<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10 - K
/x/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (Fee Required)
For the fiscal year ended March 31, 1995
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (Fee Required)
For the transition period from ______________ to ______________
Commission File No. 1-4095
McDERMOTT INCORPORATED
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 74-1032246
- --------------------------------------------------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
1450 Poydras Street, New Orleans, Louisiana 70112-6050
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (504) 587-4411
Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class Name of Exchange on which registered
------------------- ------------------------------------
Series A $2.20 Cumulative Convertible New York Stock Exchange
Preferred Stock, $1 Par Value
Series B $2.60 Cumulative Preferred New York Stock Exchange
Stock, $1 Par Value
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes /x/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
The aggregate market value of voting stock held by non-affiliates of the
registrant was $177,695,131 as of April 26, 1995.
The number of shares of Common Stock, par value $1 per share, outstanding as of
April 26, 1995 was 3,600.
DOCUMENTS INCORPORATED BY REFERENCE
The Information Statement for action to be taken without a meeting of
shareholders on August 8, 1995 is incorporated by reference into Part III of
this report.
<PAGE> 2
M c D E R M O T T I N C O R P O R A T E D
I N D E X - F O R M 10 - K
<TABLE>
<CAPTION>
PAGE
----
PART I
<S> <C>
Items 1. & 2. BUSINESS AND PROPERTIES
A. General 1
B. Power Generation Systems and Equipment
General 3
Foreign Operations 4
Raw Materials 4
Customers and Competition 4
Backlog 5
Factors Affecting Demand 6
C. Marine Construction Services
General 7
Foreign Operations 8
Raw Materials 8
Customers and Competition 8
Backlog 8
Factors Affecting Demand 9
D. Patents and Licenses 9
E. Research and Development Activities 9
F. Insurance 10
G. Employees 11
H. Environmental Regulations and Matters 11
I. Transactions With Related Parties 13
Item 3. LEGAL PROCEEDINGS 14
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 15
</TABLE>
i
<PAGE> 3
I N D E X - F O R M 1 0 - K
<TABLE>
<CAPTION>
PAGE
----
PART II
<S> <C>
Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND
RELATED SECURITY HOLDER MATTERS 16
Item 6. SELECTED FINANCIAL DATA 17
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General 18
Fiscal Year 1995 vs. Fiscal Year 1994 18
Fiscal Year 1994 vs. Fiscal Year 1993 20
Effects of Inflation and Changing Prices 21
Liquidity and Capital Resources 21
Item 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA
Report of Independent Auditors 25
Consolidated Balance Sheet - March 31, 1995 and 1994 26
Consolidated Statement of Loss for the Three Fiscal
Years ended March 31, 1995 28
Consolidated Statement of Stockholder's Equity for the
Three Fiscal Years ended March 31,1995 29
Consolidated Statement of Cash Flows for the Three Fiscal
Years ended March 31, 1995 30
Notes to Consolidated Financial Statements 32
Item 9. DISAGREEMENTS WITH AUDITORS ON ACCOUNTING
AND FINANCIAL DISCLOSURE 61
</TABLE>
ii
<PAGE> 4
I N D E X - F O R M 1 0 - K
<TABLE>
<CAPTION>
PAGE
----
PART III
<S> <C>
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 62
Item 11. EXECUTIVE COMPENSATION 62
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT 62
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 62
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K 63
Signatures 65
</TABLE>
iii
<PAGE> 5
P A R T I
Items 1. and 2. BUSINESS AND PROPERTIES
A. GENERAL
McDermott Incorporated was incorporated in 1946 as a successor to a business
which had been providing construction services to the oil and gas industry since
the 1920's. McDermott International, Inc. ("International") is the parent
company of the McDermott group of companies, which includes McDermott
Incorporated and J. Ray McDermott, S.A. ("JRM"). International's Common Stock,
McDermott Incorporated's Series A $2.20 Cumulative Convertible Preferred Stock
and Series B $2.60 Cumulative Preferred Stock and JRM's Common Stock and Series
B $2.25 Cumulative Convertible Exchangeable Preferred Stock are publicly traded.
On January 31, 1995, International contributed substantially all of its marine
construction services business to JRM, a new company incorporated under the laws
of the Republic of Panama in 1994. Also, on January 31, 1995, JRM acquired
Offshore Pipelines, Inc. (the "Merger"), pursuant to an Agreement and Plan of
Merger dated as of June 2, 1994, as amended (the "Merger Agreement"). In
connection with the Merger, McDermott Incorporated sold a portion of its marine
construction services business to International. The business sold included the
fabrication and installation of marine pipelines and offshore structures and
subsea production systems. The discussion set forth below under Items 1. and 2.
describes the McDermott Incorporated's Marine Construction Services business
segment as currently conducted after the sale.
Unless the context otherwise requires, hereinafter the "Delaware Company" will
be used to mean McDermott Incorporated, a Delaware corporation which is a
subsidiary of International, and its consolidated subsidiaries. "International"
will be used to mean McDermott International, Inc., a Panama corporation; "JRM"
will be used to mean J. Ray McDermott, S.A., a Panama corporation, a majority
owned subsidiary of International, and its consolidated subsidiaries; and
"McDermott International" will be used to mean the consolidated enterprise.
The Delaware Company operates in two business segments:
- Power Generation Systems and Equipment, whose principal businesses
are the supply of fossil-fuel and nuclear steam generating systems
and equipment to the electric power generation industry, and nuclear
reactor components to the U.S. Navy; and
- Marine Construction Services, which supplies services for the
offshore oil, natural gas and hydrocarbon processing industries and
to other marine construction companies. Principal activities include
design, engineering, procurement, fabrication and construction, and
project and construction management. This segment also provides
maintenance and construction services for a variety of marine
vessels for both the inland and oceangoing shipping industries.
The business of the Power Generation Systems and Equipment segment is conducted
primarily through a subsidiary of McDermott Incorporated, Babcock & Wilcox
Investment Company, the principal subsidiary of which is The Babcock & Wilcox
Company. Unless the context otherwise requires, hereinafter "B&W" will be used
to mean Babcock & Wilcox Investment Company and its consolidated subsidiaries,
including The Babcock & Wilcox Company.
1
<PAGE> 6
The Delaware Company has a continuing program of reviewing joint venture,
acquisition and disposition opportunities.
The following tables show revenues and operating income (loss) of the Delaware
Company for the three fiscal years ended March 31, 1995 and do not include the
operating results for the period after January 31, 1995 for the portion of the
marine construction services business sold to International. See Note 16 to the
consolidated financial statements for additional information with respect to
the Delaware Company's business segments and operations in different geographic
areas.
REVENUES
(Dollars in Millions)
<TABLE>
<CAPTION>
FOR FISCAL YEARS ENDED MARCH 31,
1995 1994 1993
----------------- ----------------- ----------------
<S> <C> <C> <C>
Power Generation Systems
and Equipment $1,663.0 75% $1,613.9 72% $1,521.0 77%
Marine Construction Services(1) 560.0 25% 632.2 28% 449.1 23%
Intersegment Transfer
Eliminations (.6) -- (2.8) -- (.5) --
- -------------------------------------------------------------------------------------------------------------
Total $2,222.4 100% $2,243.3 100% $1,969.6 100%
=============================================================================================================
</TABLE>
OPERATING INCOME (LOSS)
(Dollars in Millions)
<TABLE>
<CAPTION>
FOR FISCAL YEARS ENDED MARCH 31,
1995 1994 1993
-------------- -------------- --------------
<S> <C> <C> <C>
Segment Operating Income (Loss):
Power Generation Systems
and Equipment $ 24.7 -- % $ 57.5 87% $ 68.5 95%
Marine Construction Services(1) (31.7) -- % 8.4 13% 3.4 5%
- --------------------------------------------------------------------------------------------------------
Total Segment Operating
Income (Loss) (7.0) -- % 65.9 100% 71.9 100%
- --------------------------------------------------------------------------------------------------------
Equity in Income of Investees:
Power Generation Systems
and Equipment 5.8 56% 8.6 95% 6.2 93%
Marine Construction Services 4.5 44% .5 5% .5 7%
- --------------------------------------------------------------------------------------------------------
Total Equity in Income
of Investees 10.3 100% 9.1 100% 6.7 100%
- --------------------------------------------------------------------------------------------------------
General Corporate Expenses (44.9) -- (43.0) -- (40.1) --
- --------------------------------------------------------------------------------------------------------
Total Operating Income (Loss) $(41.6) -- $ 32.0 - $ 38.5 --
========================================================================================================
</TABLE>
(1) See Note 2 to the consolidated financial statements regarding the sale of a
portion of the marine construction business during fiscal year 1995 and
Note 3 regarding the acquisition of Delta Catalytic Corporation during
fiscal year 1994.
2
<PAGE> 7
B. POWER GENERATION SYSTEMS AND EQUIPMENT
GENERAL
The Power Generation Systems and Equipment segment provides engineered products
and services for energy conversion worldwide. The segment supplies individually
engineered boilers, complete fossil fuel steam generating systems and related
equipment and facilities, and environmental control systems for electric power
generation and for industrial processes. It is also engaged in the erection of
electric power plants and industrial facilities and the repair and alteration of
such existing equipment. This segment provides replacement parts and engineered
plant enhancements for existing fossil fuel steam generating systems and
specially engineered accessories and components, such as air heaters and
cleaning systems for heat transfer surfaces. It also supplies air-cooled and
condensing heat exchangers for the process and power industries.
This segment is actively involved in the market for providing power through
cogeneration, refuse-fueled power units and other independent power producing
plants. It is participating in this market as an equipment supplier, as an
operations and maintenance contractor and through ownership interests.
The Power Generation Systems and Equipment segment provides nuclear fuel
assemblies and nuclear reactor components to the U. S. Navy for the Naval
Reactors Program. Revenues from the U. S. Government related to this activity
were approximately 14%, 13% and 13% of the Delaware Company's total revenues for
fiscal years 1995, 1994 and 1993, respectively. This activity has made
significant contributions to the operating income of the Delaware Company in all
three fiscal years. B&W, in addition to its Naval Reactors Program business, is
a supplier of ordnance, missile and torpedo metal parts and other equipment and
services to the U.S. Government and is proceeding with new, non-defense
Government projects and exploring new programs which require the technological
capabilities it developed as a Government contractor for the Naval Reactors
Program. U.S. Government budget reductions, including the cancellation of the
advanced solid rocket motor and super conducting super collider projects in
prior years, have negatively affected this segment's government operations.
B&W is a major supplier of nuclear steam generating equipment, including
critical heat exchangers and replacement recirculating steam generators, in the
Canadian, U.S. and international markets, primarily from its Cambridge, Ontario
location. Although no new contracts for nuclear steam generating systems have
been awarded in the United States for a number of years, this facility was
awarded contracts during fiscal years 1993 and 1995 valued at approximately
$430,000,000 to supply replacement recirculating steam generators to four
domestic utilities through fiscal year 1999. B&W also supplies field repair and
refurbishment services to the Canadian and international markets from this
location.
The principal plants of this segment, which are owned by B&W, are located at
Indianapolis, Indiana; West Point, Mississippi; Barberton and Lancaster, Ohio;
Beasley and Paris, Texas; Lynchburg, Virginia; and Cambridge, Ontario, Canada.
All these plants are well maintained, have suitable equipment and are of
adequate size.
3
<PAGE> 8
FOREIGN OPERATIONS
The amounts of Power Generation Systems and Equipment's revenues, including
intersegment revenues, and segment operating income derived from operations
outside of the United States, and the approximate percentages of those revenues
and segment operating income to the Delaware Company's total revenues and total
segment operating income, respectively, follow:
<TABLE>
<CAPTION>
REVENUES SEGMENT OPERATING INCOME
FISCAL YEAR AMOUNT PERCENT AMOUNT PERCENT
(Dollars in Thousands)
<S> <C> <C> <C> <C>
1995 $530,689 24% $37,469 -%
1994 372,474 17% 31,577 48%
1993 243,394 12% 11,556 16%
</TABLE>
B&W primarily conducts its foreign business from its Cambridge, Ontario
location, which also serves the United States market. Products for international
installation are engineered and built in B&W's United States and Canadian
facilities, as well as in the facilities of less than majority-owned joint
venture companies (equity investees) of International, principally located in
China, Indonesia, India and Egypt.
RAW MATERIALS
The principal raw materials used by this segment to construct power generation
systems and equipment consist of carbon and alloy steels in various forms, such
as plate, forgings, structurals, bars, sheet, strip, heavy wall pipe and tubes.
Significant amounts of components and accessories are also purchased for
assembly for supplied systems and equipment. These raw materials and components
generally are purchased as needed for individual contracts.
Although shortages of certain of these raw materials have existed from time to
time, no serious shortage exists at the present time. In addition, this segment
is not sole source dependent for any significant raw materials except for the
uranium for the nuclear fuel assemblies supplied to the Naval Reactors Program,
which is furnished and owned by the U.S. Government.
CUSTOMERS AND COMPETITION
The principal customers of this segment are the electric power generation
industry (including government-owned utilities and independent power producers),
the U. S. Government (including its contractors), and the pulp and paper and
other process industries such as oil refineries and steel mills; and other
industrial institutions. The electric power generation industry (including
government-owned utilities) accounted for approximately 41%, 36% and 29% of the
Delaware Company's total revenues for fiscal years 1995, 1994 and 1993,
respectively. U.S. Government business with this segment, excluding
government-owned utilities, accounted for approximately 16%, 17% and 20% of the
Delaware Company's total revenues for such periods.
4
<PAGE> 9
Steam generating system orders are customarily awarded after competitive bids
have been submitted as proposals based on the estimated cost of each job. Within
the United States, a number of domestic and foreign-based companies,
specializing in steam generating systems, equipment and services, compete with
B&W in the fossil fuel steam generating system business. In international
markets, these companies plus additional foreign-based companies compete with
B&W. B&W also manufactures and sells components such as replacement
recirculating steam generators, which are incorporated into nuclear steam
generating systems designed by other firms. In the sale of these nuclear steam
generating systems, B&W competes with a small number of companies. A number of
companies are in competition with B&W in environmental control equipment,
related specialized industrial equipment and the independent power producing
business. Other suppliers of fossil fuel steam systems, as well as many other
businesses, compete for replacement parts, repair and alteration and other
services required to backfit and maintain existing systems.
In regard to the Naval Reactors Program, B&W is the sole supplier of nuclear
fuel assemblies and reactor components to the U. S. Navy. In May 1995, B&W was
awarded new orders for aircraft carrier components and prototypical steam
generation equipment for the newest submarine design. B&W is the sole supplier
to the U. S. Navy for all major nuclear steam system equipment for the Naval
Reactors Program. There are a small number of suppliers of small nuclear
components with B&W being the largest based on revenues.
BACKLOG
Backlog as of March 31, 1995 and 1994 for the Power Generation Systems and
Equipment segment was $2,058,215,000 and $2,398,285,000 or approximately 84% and
85%, respectively, of the Delaware Company's backlog. Of the March 31, 1995
backlog, it is expected that approximately $1,012,915,000 will be recognized in
revenues in fiscal year 1996, $528,242,000 in fiscal year 1997 and $517,058,000
thereafter, of which approximately 71% will be recognized in fiscal years 1998
through 2000. At March 31, 1995, this segment's backlog with the U. S.
Government was $631,578,000 (of which $21,607,000 had not yet been funded), or
approximately 26% of the Delaware Company's total backlog.
During fiscal year 1995, B&W was awarded a $155,000,000 contract from China
National Machinery Import & Export Corporation to supply two 600-megawatt
coal-fired boilers and auxiliary equipment for the Yangzhou Power Plant Project
in Yangzhou City, The People's Republic of China. In addition, in fiscal year
1995, B&W was also awarded a $150,000,000 contract from Israel Electric Company
to supply two 550-megawatt coal-fired boilers for the Rutenburg Station at
Ashkelon, Israel. Also during fiscal year 1995, B&W was awarded a $150,000,000
contract from Commonwealth Edison Company of Chicago, Illinois to design,
manufacture, and supply eight nuclear steam generators. In addition, during
fiscal year 1995, B&W obtained a letter of award amounting to $100,000,000 for
the engineering, procurement and construction of a power station in Pakistan's
Punjab province. The plant will consist of one 480-megawatt oil-fired steam
generator and a steam turbine generator.
If in management's judgment it becomes doubtful whether contracts will proceed,
the backlog is adjusted accordingly. If contracts are deferred or cancelled, B&W
is usually entitled to a financial settlement related to the individual
circumstances of the contract. Operations and
5
<PAGE> 10
maintenance contracts, which are performed over an extended period, are included
in backlog based upon an estimate of the revenues from these contracts.
B&W attempts to cover increased costs of anticipated changes in labor, material
and service costs of long-term contracts either through an estimation of such
changes, which is reflected in the original price, or through price escalation
clauses. Most long-term contracts have provisions for progress payments.
FACTORS AFFECTING DEMAND
Electric utilities in Asia and the Middle East are active purchasers of large,
new baseload generating units, due to the rapid growth of their economies and to
the small existing stock of electrical generating capacity in most developing
countries. These newly-emerging economies need power and steam generating
systems, equipment and services to build their industrial base.
Electrical consumption has grown moderately in the United States in recent
years. Electric utilities have deferred ordering large, new baseload units
because of continuing uncertainties over fuel prices, rate regulation and
environmental rules. When electric utilities are in need of peaking capacity,
many are purchasing combustion turbines with short lead-times or they are
purchasing electricity from other utilities with excess capacity and
non-regulated sources, such as cogenerators and independent power producers.
The current competitive economic environment for the electric power industry in
the United States has intensified, as the Federal Energy Regulatory Commission
has begun to implement the provisions of the Energy Policy Act of 1992, which
deregulated the electric power generation industry by allowing independent power
producers and other companies access to its transmission and distribution
systems, and the Clean Air Act Amendments of 1990 have caused U.S. utilities to
defer ordering large new baseload power plants and to defer repairs and
refurbishments on existing plants. Most electric utilities have already
purchased equipment to comply with Phase I of the Clean Air Act, and many will
defer purchases of new equipment to comply with Phase II deadlines until after
the turn of the century.
Steam generation equipment is purchased most frequently by firms in the
energy-intensive industries, including pulp and paper, oil refining, chemicals
and primary metals. In addition, environmental regulations have required the oil
refining, pulp and paper, chemicals, and utility industries to invest in
pollution control equipment, which has limited the investment available for
additional steam generation capacity. These factors and the current economic
environment have affected demand for industrial-related product lines and these
markets are expected to remain very competitive.
With the maturing of the U. S. Navy's shipbuilding program and U. S. Government
defense budget reductions, the demand for nuclear fuel assemblies and reactor
components for the U.S. Navy has been declining since the mid-1980's. However,
B&W became the sole source provider of these assemblies in fiscal year 1991 and
supplies nuclear fuel assemblies due to reload requirements. The backlog of
orders for U. S. Navy nuclear fuel assemblies and nuclear reactor components
comprised a substantial portion of this segment's backlog with the U. S.
Government at March 31, 1995 and this activity is expected to continue to be a
significant,
6
<PAGE> 11
but declining, part of such backlog. Also, U.S. Government budget reductions,
including the cancellation of the advanced solid rocket motor and super
conducting super collider projects, in prior years, have negatively affected
this segment's other government operations.
B&W has applied its technological capabilities by supplying new products for
power generation applications. It has diversified into new markets and
activities not related to power generation that require complex engineering and
machining. Examples of these markets include environmental restoration services,
computer integrated manufacturing products and services, and the management of
government owned facilities. Currently, B&W manages and operates a government
owned facility at the Department of Energy's Idaho National Engineering
Laboratory and beginning July 1, 1995, will participate in the management and
operation of the Rocky Flats Environmental Technology Site near Denver, Colorado
with six other companies.
C. MARINE CONSTRUCTION SERVICES
GENERAL
In connection with the Merger of Offshore Pipelines, Inc. into JRM on
January 31, 1995, the Delaware Company sold a portion of its marine construction
services business to International. The discussion below describes the Delaware
Company's Marine Construction Services segment as currently conducted after the
sale.
The Marine Construction Services segment supplies design, engineering,
procurement, fabrication and construction, and project and construction
management services to the offshore oil and gas industry for all types
of drilling and production operations and facilities. It also provides
maintenance services and tool rental to energy related industries.
This segment's shipyard activities include complete maintenance and
construction facilities for a variety of marine vessels, including barges,
container ships, bulk carriers, and other specialized vessels. This segment's
shipyard is located on approximately 58 acres of leased land near Morgan City,
Louisiana.
During June 1993, the Delaware Company acquired a controlling interest in Delta
Catalytic Corporation ("DCC") in the first step in a two-step transaction. The
Delaware Company and Delta Catalytic Corporation of Calgary, Alberta, have
reached an agreement which accelerates from fiscal year 1997 to June 1995, the
Delaware Company's purchase of the remaining portion of DCC. DCC provides
engineering, procurement, construction and maintenance services to industries
worldwide; including oil, gas, marine construction and hydrocarbon processing.
The Delaware Company owns a 49% interest in a joint venture, Universal
Fabricators, Incorporated, whose activities include the fabrication and assembly
of structures and equipment for offshore drilling and production operations and
facilities, and is located in New Iberia, Louisiana.
The Delaware Company owns a 49% interest in a Mexican joint venture,
Construcciones Maritimas Mexicanas, that operates 2 self-propelled combination
derrick-pipelaying barges (1 capable of lifting 2,000 tons) and 1 pipelaying
barge.
7
<PAGE> 12
FOREIGN OPERATIONS
The amounts of Marine Construction Services' revenues, including intersegment
revenues, and segment operating income (loss) derived from operations outside of
the United States, and the approximate percentages of those revenues and segment
operating income to the Delaware Company's total revenues and total segment
operating income (loss), respectively, follow:
<TABLE>
<CAPTION>
REVENUES SEGMENT OPERATING INCOME (LOSS)
FISCAL YEAR AMOUNT PERCENT AMOUNT PERCENT
(Dollars in Thousands)
<S> <C> <C> <C> <C>
1995 $235,923 11% $(12,752) - %
1994 238,656 11% 7,403 11%
1993 3,100 - % (745) - %
</TABLE>
The majority of the Delaware Company's foreign operations are conducted in
Calgary, Alberta, Canada at DCC which was acquired in fiscal year 1994. See
Note 3 to the consolidated financial statements.
RAW MATERIALS
The raw materials used by this segment, such as carbon and alloy steel in
various forms, welding gases, concrete, fuel oil and gasoline, are available
from many sources and this segment is not dependent upon any single supplier or
source. Although shortages of certain of these raw materials and fuels have
existed from time to time, no serious shortage exists at the present time.
CUSTOMERS AND COMPETITION
This segment's principal customers are oil and gas, refining and petrochemical
process, and inland and oceangoing shipping companies. Customers generally
contract with this segment for the design, engineering, procurement,
fabrication and construction and project management of specific platforms,
pumping stations, marine pipelines, and production networks and the
construction of marine vessels. Contracts are usually awarded on a competitive
bid basis.
There are several companies which compete effectively with the Delaware Company
in each of this segment's activities.
BACKLOG
As of March 31, 1995 and 1994, the Marine Construction Services' backlog
amounted to $406,451,000 and $430,338,000 (including $148,913,000 relating to
those businesses sold to International), or approximately 16% and 15%,
respectively, of the Delaware Company's total backlog. Not included in backlog
at March 31, 1995 and 1994 was backlog relating to contracts performed by
unconsolidated joint ventures of $36,000,000 and $141,000,000 (including
$113,000,000 relating to those businesses sold to International), respectively.
8
<PAGE> 13
Backlog reflects the low level of this segment's U.S. markets and the sale of a
portion of the Delaware Company's marine construction services business to
International on January 31, 1995. Of the March 31, 1995 backlog, it is expected
that approximately $208,483,000 will be recognized in revenues in fiscal year
1996, $103,635,000 in fiscal year 1997 and $94,333,000 thereafter.
Work is performed on a fixed price, cost plus or day rate basis or combination
thereof. This segment attempts to cover increased costs of anticipated changes
in labor, material and service costs of long-term contracts either through an
estimation of such changes, which is reflected in the original price, or through
price escalation clauses. Most long-term contracts have provisions for progress
payments.
FACTORS AFFECTING DEMAND
The activity of the Marine Construction Services' segment depends mainly on the
capital expenditures of oil and gas companies and foreign governments for
developmental construction. These expenditures are influenced by the selling
price of oil and gas along with the cost of production and delivery, the terms
and conditions of offshore leases, the discovery rates of new reserves offshore,
the ability of the oil and gas industry to raise capital, and local and
international political and economic conditions.
Oil company capital exploration and production budgets in calendar year 1995 are
moderately higher than 1994. Both domestic and international areas are expected
to increase, although domestic will be at a slower rate of increase. World oil
prices in calendar year 1994 were below those in 1993. This has had a negative
impact on near term marine construction activities. World oil prices in calendar
year 1995 are expected to be somewhat higher than those in 1994. The composite
spot price for natural gas in the United States was substantially lower in
calendar year 1994 than in 1993 and had continued to decline through May 1995.
In addition, the capital and maintenance budgets of the oil and gas processing,
refining and petrochemical process industries are also influenced by the prices
of oil and natural gas.
This segment's markets are expected to remain at a low level in the U.S. during
fiscal year 1996.
D. PATENTS AND LICENSES
Many U. S. and foreign patents have been issued to the Delaware Company and it
has many pending patent applications. Patents and licenses have been acquired
and licenses have been granted to others when advantageous to the Delaware
Company. While the Delaware Company regards its patents and licenses to be of
value, no single patent or license or group of related patents or licenses is
believed to be material in relation to its business as a whole.
E. RESEARCH AND DEVELOPMENT ACTIVITIES
The Delaware Company conducts its principal research and development activities
at its research centers in Alliance, Ohio and Lynchburg, Virginia; and also
conducts development activities at its various manufacturing plants and
engineering and design offices. During the fiscal years ended March 31, 1995,
1994 and 1993, approximately $63,695,000, $67,695,000, and $60,996,000,
respectively, was spent by the Delaware Company on
9
<PAGE> 14
research and development activities, of which approximately $44,240,000,
$48,112,000, and $42,082,000, respectively, was paid for by customers of the
Delaware Company. Research and development activities were related to
development and improvement of new and existing products and equipment and
conceptual and engineering evaluation for translation into practical
applications, primarily for the Power Generation Systems and Equipment segment.
The Delaware Company's new multi-million dollar clean environment development
facility in Alliance, Ohio was completed during fiscal year 1995. The facility
was constructed in response to present and future emission pollution standards
in the U.S. and worldwide. Approximately 311 employees were engaged full time in
research and development activities at March 31, 1995.
F. INSURANCE
The Delaware Company maintains liability and property insurance that it
considers normal in the industry. However, certain risks are either not
insurable or insurance is available only at rates which the Delaware Company
considers uneconomical. Among such risks are war and confiscation of property in
certain areas of the world, pollution liability in excess of relatively low
limits and, in recent years, asbestos liability. Depending on competitive
conditions and other factors, the Delaware Company endeavors to obtain
contractual protection against uninsured risks from its customers.
The Delaware Company's insurance policies do not insure against liability and
property damage losses resulting from nuclear accidents at reactor facilities of
its utility customers. To protect against liability for damage to customers'
property, the Delaware Company has obtained waivers of subrogation from its
customers and its insurer and is generally named as an additional insured under
its customers' nuclear property policy. To protect against liability from claims
brought by third parties, the Delaware Company is insured under its customers'
nuclear liability policies and has the benefit of the indemnity and limitation
of any applicable liability provisions of the Price-Anderson Act, as amended
("the Act"). The Act limits the public liability of manufacturers and operators
of licensed nuclear facilities and other parties who may be liable in respect
of, and indemnifies them against, all claims in excess of an amount which is
determined by the sum of commercially available liability insurance plus certain
retrospective premium assessments payable by operators of commercial nuclear
reactors. For those sites where the Delaware Company provides environmental
remediation services, it seeks the same protection from its customers as it does
for its other nuclear activities.
Although the Delaware Company does not own or operate any nuclear reactors, it
has coverage under commercially available nuclear liability and property
insurance for four of its five facilities which are licensed to maintain special
nuclear materials. The fifth facility operates primarily as a conventional
research center. However, this facility is licensed to possess special nuclear
material and has a small and limited amount of special nuclear material on the
premises. Two of the four owned facilities are located at the Delaware Company's
Lynchburg, Virginia site. These facilities are insured under a nuclear liability
policy which also insures the facility of B&W Fuel Company ("BWFC") that was
sold during fiscal year 1993. All three facilities share the same nuclear
liability insurance limit as the commercial insurer would not allow BWFC to
obtain a separate nuclear liability insurance policy. Due to the type or
quantity of nuclear material present, two of the five facilities have the
benefit of the indemnity and limitation of liability provisions of the Act,
pursuant to agreements entered into with the U. S. Government. In
10
<PAGE> 15
addition, contracts to manufacture and supply nuclear fuel or nuclear components
to the U. S. Government generally contain contractual indemnity clauses, which
become effective at the time of shipment, whereby the U. S. Government has
assumed the risks of public liability claims.
The insurance coverage of the Delaware Company for products liability and
employers' liability claims is subject to varying insurance limits which are
dependent upon the year involved. The Babcock & Wilcox Company has an agreement
with a majority of its principal insurers concerning the method of allocation of
products liability asbestos claim payments to the years of coverage. Pursuant to
the agreement, The Babcock & Wilcox Company negotiates and settles these claims
and bills these amounts to the appropriate insurers. For financial reporting
purposes, a provision has been recognized to the extent that recovery of these
amounts from the Delaware Company's insurers has not been determined to be
probable. Estimated liabilities for pending and future non-employee products
liability asbestos claims are derived from the Delaware Company's claims history
and constitute management's best estimate of such future costs. Estimated
insurance recoveries are based upon analysis of insurers providing coverage of
the estimated liabilities. Inherent in the estimate of such liabilities and
recoveries are expected trends in claim severity and frequency and other
factors, including recoverability from insurers, which may vary significantly as
claims are filed and settled. Accordingly, the ultimate loss may differ
materially from the amount provided in the consolidated financial statements.
G. EMPLOYEES
At March 31, 1995 the Delaware Company employed, under its direct supervision,
approximately 16,000 persons compared with 19,400 (including approximately 2,000
employees related to the portion of the marine construction services business
sold to International) at March 31, 1994. Approximately 4,600 employees were
members of labor unions at March 31, 1995 as compared with approximately 4,900
at March 31, 1994. The majority of B&W's manufacturing facilities operate under
union contracts which customarily are renewed every two to three years. During
the next twelve months, six contracts covering approximately 2,100 of B&W's
hourly workers will expire. B&W expects to renew these contracts successfully,
without incident. The Delaware Company considers its relationships with its
employees to be satisfactory.
H. ENVIRONMENTAL REGULATIONS AND MATTERS
Like other companies, the Delaware Company is subject to the existing and
evolving standards relating to the environment. The Delaware Company's
compliance with U. S. federal, state and local environmental protection
regulations necessitated capital expenditures of $1,298,000 in fiscal year 1995,
and it expects to spend another $4,490,000 on capital expenditures over the next
five years. However, the Delaware Company cannot predict all of the
environmental requirements or circumstances which will exist in the future but
it anticipates that environmental standards will become increasingly stringent
and costly. Complying with existing environmental regulations resulted in a
charge against income before taxes of approximately $8,991,000 in fiscal year
1995 (excluding a provision for the decontamination and decommissioning relating
to the closing of certain of its nuclear manufacturing facilities described
below).
11
<PAGE> 16
The Delaware Company has been identified as a potentially responsible party at
various cleanup sites under the Comprehensive Environmental Response,
Compensation and Liability Act, as amended. The Delaware Company has not been
determined to be a major contributor of wastes to these sites. However, each
potentially responsible party or contributor may face assertions of joint and
several liability. Generally, however, a final allocation of costs is made based
on relative contributions of wastes to each site. Based on its relative
contribution of waste to each site, the Delaware Company's share of the ultimate
liability for the various sites is not expected to have a material effect on the
Delaware Company's consolidated financial position.
Remediation projects have been or may be undertaken at certain of the Delaware
Company's current and former plant sites, and, during fiscal year 1995, B&W
completed, subject to Nuclear Regulatory Commission ("NRC") certification, the
decommissioning and decontamination of its former nuclear fuel processing plant
at Apollo, Pennsylvania. All fabrication and support buildings have been
removed, and virtually all contaminated soil has been shipped to authorized
disposal facilities. B&W is in the final stage of obtaining approval from the
NRC to have the site released for unrestricted use.
During the March 1995 quarter, a decision was made to close certain nuclear
manufacturing facilities and a provision of $41,724,000 for the decontamination,
decommissioning, and the closing of these facilities was recognized immediately.
Previously, decontamination and decommissioning costs were being accrued over
the facilities' remaining expected life. Decontamination will proceed as
permitted by the existing NRC license, while funding support will be sought and
a decommissioning plan will be submitted for review and approval as required by
the NRC. B&W expects to have reached agreement with the NRC in fiscal year 1997
on the plan that will provide for the completion of facilities dismantlement and
soil restoration by the end of fiscal year 2001. B&W expects to request approval
from the NRC to release the site for unrestricted use at that time.
The Department of Environmental Resources of the Commonwealth of Pennsylvania,
("PADER"), by letter dated March 19, 1994, advised B&W that it will seek
monetary sanctions and remedial and monitoring relief, related to B&W's Parks
Facilities in Parks Township, Armstrong County, Pennsylvania. The relief sought
relates to potential groundwater contamination related to the previous
operations of the facilities. B&W is currently negotiating with PADER and
expects to reach a settlement without having to resort to litigation. Any
sanctions ultimately assessed are not expected to have a material effect on the
consolidated financial statements of the Delaware Company.
The Delaware Company performs significant amounts of work for the U. S.
Government under both prime contracts and subcontracts and operates certain
facilities that are licensed to possess and process special nuclear materials
and thus is subject to continuing reviews by governmental agencies, including
the Environmental Protection Agency and the Nuclear Regulatory Commission.
Decommissioning regulations promulgated by the U. S. Nuclear Regulatory
Commission require B&W to provide financial assurance that it will be able to
pay the expected cost of decommissioning its facilities at the end of their
service lives. B&W provided financial assurance of approximately $11,000,000
during fiscal year 1995 by issuing letters of credit for the ultimate
decommissioning of all its licensed facilities, except one. This facility, which
12
<PAGE> 17
represents the largest portion of B&W's eventual decommissioning costs, has
provisions in its government contracts pursuant to which all of its
decommissioning costs and financial assurance obligations are covered by the
U.S. Government.
Compliance with existing government regulations controlling the discharge of
materials into the environment, or otherwise relating to the protection of the
environment (including decommissioning), does not have, nor is it expected to
have, a material adverse effect upon the consolidated financial position of the
Delaware Company.
I. TRANSACTIONS WITH RELATED PARTIES
The Delaware Company has material transactions occurring during the normal
course of operations, including the sale of engineering and design services and
the performance of certain general and administrative services, with
International and other affiliated companies. The Delaware Company has also
entered into various financial agreements with International and its
subsidiaries, including a Stock Purchase and Sale Agreement. (See Note 6 to the
consolidated financial statements.)
The Delaware Company has charged International for engineering services by
reference to charges to unrelated parties for similar work and for general and
administrative activities based on an allocation of cost. The Delaware Company
intends to continue to provide various services to International and the
arrangements for pricing those services will be reviewed from time to time.
The casualty and marine insurance programs of the Delaware Company are placed
through commercial insurance carriers which in turn substantially reinsure these
exposures to a wholly-owned insurance subsidiary of International. Management
believes that this approach is more cost effective as there is no commercial
market on the same economic terms for these types of exposures.
13
<PAGE> 18
Item 3. LEGAL PROCEEDINGS
Due to the nature of its business, the Delaware Company is, from time to time,
involved in litigation. It is management's opinion that none of this litigation
will have a material adverse effect on the consolidated financial position of
the Delaware Company.
For a discussion of the Delaware Company's potential liability for non-employee
products liability asbestos claims, see Item 1F and Note 1 to the consolidated
financial statements.
14
<PAGE> 19
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of the fiscal year covered by
this report to a vote of security holders, through the solicitation of proxies
or otherwise.
15
<PAGE> 20
P A R T I I
Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY
HOLDER MATTERS
As a result of the plan of reorganization announced by the Delaware Company on
October 28, 1982 and completed on March 15, 1983, all of the Delaware Company's
outstanding Common Stock is owned by International and, consequently, there is
no market for the Delaware Company's Common Stock. For restrictions on the
Delaware Company's present or future ability to pay dividends, see Note 7 to the
consolidated financial statements.
16
<PAGE> 21
Item 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDED MARCH 31,
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C> <C>
Revenues $ 2,222,390 $ 2,243,366 $ 1,969,622 $ 2,309,408 $ 2,221,602
Income (Loss)
From Continuing
Operations before
Extraordinary Items
and Cumulative
Effect of Accounting
Changes $ (73,880) $ (26,316) $ (27,079) $ 29,857 $ (29,984)
Net Income
(Loss) $ (74,392) $ (127,066) $ (273,825) $ 26,489 $ (10,690)
Total Assets $ 3,386,429 $ 3,500,726 $ 2,345,658 $ 2,464,818 $ 2,653,404
Long-Term Debt $ 423,150 $ 584,532 $ 492,036 $ 658,007 $ 516,221
Redeemable
Preferred Stocks 179,251 196,672 204,482 204,482 204,482
--------------- --------------- --------------- -------------- --------------
Total $ 602,401 $ 781,204 $ 696,518 $ 862,489 $ 720,703
</TABLE>
See Note 1 to the consolidated financial statements regarding the adoption of
Statement of Financial Accounting Standards ("SFAS") No. 112 in fiscal year
1995, Emerging Issues Task Force Issue No. 93-5 in fiscal year 1994 and SFAS No.
106 and SFAS No. 109 in fiscal year 1993. See Note 2 regarding the sale of a
portion of the marine construction business to International in fiscal year 1995
and Note 3 regarding the acquisition of Delta Catalytic Corporation in fiscal
year 1994. See Note 11 regarding the uncertainty as to the ultimate loss
relating to products liability asbestos claims.
In fiscal year 1995, Loss before Cumulative Effect of Accounting Change included
after tax charges of $30,218,000 for provisions for the decontamination,
decommissioning and closing of certain nuclear manufacturing facilities and the
closing of a manufacturing facility, and $8,832,000 for the reduction of
estimated products liability asbestos claims recoveries from insurers. Also, in
fiscal year 1995, after tax income included $16,631,000 for a reduction in
accrued interest expense due to the settlement of outstanding tax issues. In
fiscal years 1993 and 1992, Income (Loss) from Continuing Operations before
Extraordinary Items and Cumulative Effect of Accounting Changes included after
tax gains from the sale of the Delaware Company's interest in its two commercial
nuclear joint ventures of $15,667,000 and $35,436,000, respectively.
All of the Common Stock of the Delaware Company is owned by International and,
therefore, no per share data is shown above.
17
<PAGE> 22
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
A significant portion of the Delaware Company's revenues and operating results
are derived from its foreign operations, which are primarily located in Canada.
As a result, the Delaware Company could be significantly affected by
international factors, such as changes in foreign currency exchange rates. The
Delaware Company's policy is to minimize its exposure to changes in foreign
currency exchange rates by attempting to match foreign currency contract
receipts with like foreign currency disbursements during contract negotiations.
To the extent that it is unable to match the foreign currency receipts and
disbursements related to its contracts, it enters into forward exchange
contracts to hedge foreign currency transactions on a continuing basis for
periods consistent with its committed exposures. The practice minimizes the
impact of foreign exchange rate movements on the Delaware Company operating
results.
During fiscal year 1995, the Delaware Company's Canadian operations contributed
34% to total revenues and $26,663,000 to operating income, reflecting increased
activity at its Cambridge, Ontario location, principally due to the supply of
replacement recirculating steam generators to domestic utilities and work for
two government owned utilities located in the Far East.
FISCAL YEAR 1995 VS FISCAL YEAR 1994
Power Generation Systems and Equipment's revenues increased $49,063,000 to
$1,663,017,000. This was primarily due to higher revenues from fabrication and
erection of fossil fuel steam and environmental control systems, nuclear fuel
assemblies and reactor components for the U.S. Government, replacement nuclear
steam generators, repair and alteration of existing fossil fuel steam systems,
and operations and maintenance contracts for small power plants. These increases
were partially offset by lower revenues from defense and space-related products
(other than nuclear fuel assemblies and reactor components), extended scope of
supply and fabrication of industrial boilers, and replacement parts.
Power Generation Systems and Equipment's segment operating income decreased
$32,836,000 to $24,691,000 due to provisions for the decontamination,
decommissioning and closing of certain nuclear manufacturing facilities and the
closing of a manufacturing facility ($46,489,000) and a favorable warranty
reserve adjustment recorded in the prior year ($11,000,000). Operating income
increased due to lower operating expenses (including favorable workers
compensation adjustments) and administrative expenses (including cost reduction
initiatives); higher volume and margins on operations and maintenance contracts;
and improved margins on plant enhancement projects. These increases were
partially offset by lower volume and margins on extended scope of supply and
fabrication of industrial boilers, lower volume on replacement parts, and lower
margins on nuclear fuel assemblies and reactor components for the U.S.
Government.
Power Generation Systems and Equipment's equity in income of investees decreased
$2,779,000 to $5,856,000 primarily due to a provision for loss on discontinuing
a domestic joint venture.
18
<PAGE> 23
Backlog for this segment at March 31, 1995 was $2,058,215,000 compared to
$2,398,285,000 at March 31, 1994. At March 31, 1995, this segment's backlog with
the U. S. Government was $631,578,000 (of which $21,607,000 had not yet been
funded). U.S. Government budget reductions have negatively affected this
segment's government operations, and backlog at March 31, 1995 and 1994 reflects
the impact of Congressional budget reductions on the advanced solid rocket motor
and super conducting super collider projects in prior years. The current
competitive economic environment has also negatively affected demand for other
industrial related product lines and these markets are expected to remain very
competitive.
As discussed (see Item 1F - Insurance), provisions for estimated future costs
for non-employee products liability asbestos claims have been recognized for
financial reporting purposes during fiscal years 1994 and 1995 (see Notes 1 and
11 to the consolidated financial statements and the discussion of Other-net
expense and Liquidity below). Inherent in the estimate of these liabilities and
recoveries are expected trends in claim severity and frequency and other
factors, including recoverability from insurers, which may vary significantly as
claims are filed and settled.
The current competitive economic environment for the electric power industry in
the United States has intensified, as the Federal Energy Regulatory Commission
has begun to implement the provisions of the Energy Policy Act of 1992, which
deregulated the electric power generation industry by allowing independent power
producers and other companies access to its transmission and distribution
systems, and the Clean Air Act Amendments of 1990 have caused U.S. utilities to
defer ordering large new baseload power plants and to defer repairs and
refurbishments on existing plants. Most electric utilities have already
purchased equipment to comply with Phase I of the Clean Air Act, and many will
defer the purchases of new equipment to comply with Phase II deadlines until the
turn of the century. Electric utilities in Asia are active purchasers of large,
new baseload generating units, due to the rapid growth of the Pacific Rim
economies and to the small existing stock of electrical generating capacity in
most developing countries.
Marine Construction Services' revenues decreased $72,292,000 to $559,950,000
primarily due to lower volume in domestic engineering, fabrication and marine
operations, and shipyard operations. These decreases were partially offset by
the inclusion of revenues of DCC, which was acquired in June 1993, for the full
fiscal year. (See Note 2 to the consolidated financial statements concerning the
sale of a portion of the marine construction services business to International
on January 31, 1995.)
Marine Construction Services' segment operating income (loss) decreased
$40,104,000 to a loss of $31,659,000 from income of $8,445,000 primarily due to
unfavorable operating results from DCC's operations, higher operating expenses,
lower margins from shipyard operations, and start-up costs associated with new
shipbuilding activities. These decreases were partially offset by higher margins
in domestic engineering.
Marine Construction Services' equity in income of investees increased $4,033,000
to $4,478,000 primarily due to improved operating results of its Mexican joint
venture.
19
<PAGE> 24
Backlog for this segment at March 31, 1995 was $406,451,000 as compared to
$430,338,000 (including $148,913,000 relating to those businesses sold to
International) at March 31, 1994. Not included in backlog at March 31, 1995 and
1994 was backlog relating to contracts performed by unconsolidated joint
ventures of $36,000,000 and $141,000,000 (including $113,000,000 relating to
those businesses sold to International), respectively.
Interest income increased $7,144,000 to $12,686,000 primarily due to higher
interest rates on investments in government obligations and other investments.
Interest expense decreased $12,534,000 to $41,336,000, primarily due to a
reduction of accrued interest on proposed tax deficiencies, partially offset by
changes in debt obligations and interest rates prevailing thereon.
Other-net expense increased $23,938,000 to $33,004,000 primarily due to a loss
related to the reduction of estimated products liability asbestos claim
recoveries from insurers, a litigation provision for the settlement of a lawsuit
and foreign currency transaction losses in the current period.
Provision for (benefit from) income taxes decreased $30,304,000 to a benefit of
$29,389,000 from a provision of $915,000 while loss before the benefit from
income taxes and cumulative effect of accounting changes increased $77,868,000
to $103,269,000. The increase in the benefit from income taxes is due primarily
to the increase in loss from operations.
Net loss decreased $52,674,000 to $74,392,000 reflecting the cumulative effect
of the adoption of SFAS No. 112, "Employers' Accounting for Postemployment
Benefits," of $512,000 in the current year and the cumulative effect of the
change in accounting for non-employee products liability asbestos claims of
$100,750,000 in the prior year, in addition to the other items described above.
FISCAL YEAR 1994 VS FISCAL YEAR 1993
Power Generation Systems and Equipment's revenues increased $92,978,000 to
$1,613,954,000. This was primarily due to higher revenues from fabrication and
erection of fossil fuel steam and environmental control systems, replacement
nuclear steam generators, repair and alteration of existing fossil fuel steam
systems, and nuclear fuel assemblies and reactor components for the U.S.
Government. These increases were partially offset by lower revenues from
extended scope of supply and fabrication of industrial boilers, defense and
space-related products other than nuclear fuel assemblies and reactor
components, and air cooled heat exchangers.
Power Generation Systems and Equipment's segment operating income decreased
$11,018,000 to $57,527,000. This was primarily due to lower volume and margins
on extended scope of supply and fabrication of industrial boilers as well as
defense and space-related products other than nuclear fuel assemblies and
reactor components. There were also lower margins on plant enhancements,
replacement parts, and repair and alteration of existing fossil fuel steam
systems, as well as higher royalty income recorded in the prior year. These
decreases were partially offset by higher volume and margins on replacement
nuclear steam generators, nuclear fuel assemblies and reactor components for the
U.S. Government and
20
<PAGE> 25
higher volume on fabrication and erection of fossil fuel steam and environmental
control systems. There were also lower general and administrative expenses, and
lower warranty expense, primarily due to net favorable warranty reserve
adjustments.
Power Generation Systems and Equipment's equity in income of investees increased
$2,457,000 to $8,635,000 due primarily to improved results in three domestic
joint ventures which own and operate a cogeneration plant and two small power
plants.
Marine Construction Services' revenues increased $183,073,000 to $632,242,000
primarily due to the acquisition of DCC. This increase was partially offset by
lower volume in fabrication and engineering operations, and procured materials.
Marine Construction Services' segment operating income increased $5,029,000 to
$8,445,000, primarily due to the acquisition of DCC, improved margins on
fabrication operations, and the accelerated depreciation and write-off of
certain fabrication facilities and marine construction equipment in the prior
year. These increases were partially offset by lower volume in fabrication and
engineering operations.
Interest expense decreased $21,275,000 to $53,870,000, primarily due to changes
in debt obligations and interest rates prevailing thereon. The decrease reflects
the redemption of high coupon debt during April and June 1993, and a reduction
in accrued interest on proposed tax deficiencies.
Other-net expense increased $6,829,000 to $9,066,000. The increase was primarily
due to the inclusion of DCC's minority interest expense in the current period
and gains on the sale of interests in two commercial nuclear joint ventures, all
in the prior period.
Provision for (benefit from) income taxes increased $6,473,000 to a provision of
$915,000 from a benefit of $5,558,000 while loss before the provision for
(benefit from) income taxes, extraordinary items and cumulative effect of
accounting changes decreased $7,236,000 to $25,401,000. The increase in the
provision for income taxes is due primarily to the increase in income from
foreign operations.
Net loss decreased $146,759,000 to $127,066,000 reflecting the cumulative effect
of the change in accounting for non-employee products liability asbestos claims
of $100,750,000 in the current year and the cumulative effect of the adoption of
SFAS No. 106, "Employers Accounting for Postretirement Benefits Other Than
Pensions," of $240,042,000 in the prior year, in addition to the other items
described above.
Effect of Inflation and Changing Prices
The Delaware Company's financial statements are prepared in accordance with
generally accepted accounting principles, using historical dollar accounting
(historical cost). Statements based on historical cost, however, do not
adequately reflect the cumulative effect of increasing costs and changes in the
purchasing power of the dollar, especially during times of significant and
continued inflation.
21
<PAGE> 26
The management of the Delaware Company is cognizant of the effects of inflation
and, in order to minimize the negative impact of inflation on its operations,
attempts to cover the increased cost of anticipated changes in labor, material
and service costs, either through an estimation of such changes, which is
reflected in an original price, or through price escalation clauses in its
contracts.
Liquidity and Capital Resources
During fiscal year 1995, the Delaware Company's cash and cash equivalents
decreased $26,350,000 to $21,014,000 and total debt increased $113,808,000 to
$719,868,000, primarily from short-term borrowings of $130,811,000. During the
same period, the Delaware Company used cash of $71,793,000 for additions to
property, plant and equipment; $43,078,000 in operating activities; $17,182,000
for the repurchase of preferred stock to satisfy current and future sinking fund
requirements; $16,707,000 for repayment of long-term debt; and $14,142,000 for
cash dividends on the Delaware Company's preferred stocks.
The decrease in receivables reflects the sale of additional receivables to a
U.S. bank. Higher payables are primarily due to the increased volume at B&W's
Canadian operations. Increases in net contracts in progress and advance billings
were primarily due to the timing of billings on B&W's Canadian contracts. Lower
income taxes reflect payments made in Canada and changes to the domestic tax
provision due to higher losses in U.S., and accrued interest includes a
reduction of accrued interest expense of $26,300,000 resulting from the
settlement of outstanding tax issues with the IRS.
Pursuant to an agreement with a majority of its principal insurers, the Delaware
Company negotiates and settles products liability asbestos claims from
non-employees and bills these amounts to the appropriate insurers. As a result
of collection delays inherent in this process, reimbursement is usually delayed
for three months or more. The number of claims had declined moderately since
fiscal year 1990, but have increased during the second half of fiscal year 1995.
Management believes, based on information currently available, that the recent
increase represents an acceleration in the timing of the receipt of these
claims, but does not represent an increase in its total estimated liability. The
average amount of these claims (historical average of approximately $4,800 per
claim over the last three years) has continued to rise. Claims paid in fiscal
year 1995 were $126,151,000, of which $111,163,000 has been recovered or is due
from insurers. Accounts receivable-other includes receivables of $34,925,000
that are due from insurers for reimbursement of settled claims. During fiscal
year 1995, the Delaware Company received notice that provisional liquidators
have been appointed to a London-based products liability asbestos insurer and
certain of its subsidiaries and as a result, a loss of $14,478,000 related to
the reduction of estimated product liability asbestos claim recoveries was
recognized. Estimated liabilities for pending and future non-employee products
liability asbestos claims are derived from the Delaware Company's claims history
and constitute management's best estimate of such future costs. Estimated
insurance recoveries are based upon analysis of insurers providing coverage of
the estimated liabilities. Inherent in the estimate of such liabilities and
recoveries are expected trends in claim severity and frequency and other factors
including recoverability from insurers, which may vary significantly as claims
are filed and settled. Accordingly, the ultimate loss may differ materially from
the amount provided in the consolidated financial statements. Settlement of the
liability is expected to occur over approximately the next 25 years. The
collection delays
22
<PAGE> 27
and the amount of claims paid, for which insurance recovery is not probable have
not had a material adverse effect upon the Delaware Company's liquidity, and
management believes, based on information currently available, that they will
not have a material adverse effect on liquidity in the future.
The Delaware Company's expenditures for property, plant and equipment increased
$9,143,000 to $71,793,000 (including $20,908,000 relating to the portion of the
marine construction services business sold to International on January 31, 1995)
in fiscal year 1995. While the majority of these expenditures were incurred to
maintain and replace existing facilities and equipment, $15,010,000 was expended
to purchase a barge which was formerly leased, and later sold to International.
The Delaware Company has committed to make capital expenditures of approximately
$9,059,000 during fiscal year 1996.
At March 31, 1995 and 1994, The Babcock & Wilcox Company had sold, with limited
recourse, an undivided interest in a designated pool of qualified accounts
receivable of approximately $175,000,000 and $170,000,000, respectively, under
an agreement with a U.S. Bank. The maximum sales limit available under this
agreement, which expires on December 31, 1997 is $225,000,000. (See Note 9 to
the consolidated financial statements).
At March 31, 1995 and 1994, the Delaware Company and its subsidiaries had
available to them various uncommitted short-term lines of credit from banks
totalling $227,903,000 and $204,565,000, respectively. Borrowings against these
lines of credit at March 31, 1995 and 1994 were $33,220,000 and $15,519,000,
respectively. In addition, The Babcock & Wilcox Company had available to it a
$128,000,000 unsecured and committed revolving line of credit facility. Loans
outstanding under the revolving credit facility may not exceed the banks'
commitments thereunder. In addition, it is a condition to borrowing under the
revolving credit facility that the borrower's consolidated net tangible assets
exceed a certain level. There were no borrowings against this facility at March
31, 1995 or 1994. DCC had available from a certain Canadian bank an unsecured
and committed revolving credit facility of $14,184,000 which expires on May 31,
1997. Borrowings outstanding against this facility at March 31, 1995 were
$7,420,000. There were no borrowings against this facility at March 31, 1994.
The Delaware Company maintains an investment portfolio of government obligations
and other investments which is classified as available for sale under SFAS No.
115 (See Note 13 to the consolidated financial statements). The fair value of
short-term investments and the long-term portfolio at March 31, 1995 was
$361,896,000 (amortized cost $361,794,000). The net unrealized gain on the
current and long-term investment portfolio, net of income tax effect, was
$52,000 at March 31, 1995. At March 31, 1995, the Delaware Company had
obligations under short-term repurchase agreements totaling $105,690,000 secured
by government obligations with a fair value of $105,066,000.
The Delaware Company is restricted, as a result of covenants in certain
agreements, in its ability to transfer funds to International and its
subsidiaries through cash dividends or through unsecured loans or investments.
Substantially all of the net assets of the Delaware Company are subject to such
restrictions. At March 31, 1995, the most restrictive of these covenants with
respect to the payment of dividends by the Delaware Company would prohibit the
payment of dividends other than current dividends on existing preferred stock.
23
<PAGE> 28
Effective February 1, 1989, the Delaware Company and a subsidiary of
International, McDermott International Investments Co., Inc. ("MIICO"), entered
into a reverse repurchase agreement whereby either party acting as a "buyer"
would purchase for cash certain U. S. Government obligations owned by the other
party acting as a "seller", and, at the date of purchase, the "seller" would
agree to repurchase the same securities at a set price (including accrued
interest) at a future specified date. There were no transactions under this
agreement during fiscal year 1995.
The Delaware Company and MIICO are parties to an agreement pursuant to which the
Delaware Company may borrow up to $150,000,000 from MIICO at interest rates
computed at the applicable federal rate determined by the IRS. There were no
borrowings against this agreement at March 31, 1995 or 1994.
Working capital decreased to a deficit of $21,580,000 at March 31, 1995 from
$160,166,000 at March 31, 1994. During 1996, the Delaware Company expects to
obtain funds to meet capital expenditure, working capital and debt maturity
requirements from operating activities, its short-term investment portfolio and
additional borrowings. On June 1, 1995, the Delaware Company repaid its 10.25%
Notes in an aggregate principal amount of $150,000,000 from its short-term
investment portfolio and additional borrowings from revolving lines of credit.
Leasing agreements for equipment, which are short-term in nature, are not
expected to impact the Delaware Company's liquidity nor capital resources.
The Delaware Company's quarterly dividends of $0.55 per share on the Series A
$2.20 Cumulative Convertible Preferred Stock and $0.65 per share on the Series B
$2.60 Cumulative Preferred Stock were the same in 1995 and 1994.
The Delaware Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes."
This standard requires, among other things, recognition of future tax benefits,
measured by enacted tax rates, attributable to deductible temporary differences
between the financial statement and income tax basis of assets and liabilities
and to tax net operating loss carryforwards, to the extent that realization of
such benefits is more likely than not.
The Delaware Company has provided a valuation allowance ($13,852,000 at March
31, 1995) for deferred tax assets which cannot be realized through carrybacks
and future reversals of existing taxable temporary differences. Management
believes that remaining deferred tax assets ($644,224,000 at March 31, 1995) in
all other tax jurisdictions are realizable through carrybacks and future
reversals of existing taxable temporary differences and, if necessary, the
implementation of tax planning strategies involving sales and sale/leasebacks of
appreciated assets. A major uncertainty that affects the ultimate realization of
deferred tax assets is the possibility of declines in value of appreciated
assets involved in identified tax planning strategies. This factor has been
considered in determining the valuation allowance. Management will continue to
assess the adequacy of the valuation allowance on a quarterly basis.
24
<PAGE> 29
Item 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
McDermott Incorporated
We have audited the accompanying consolidated balance sheet of McDermott
Incorporated as of March 31, 1995 and 1994, and the related consolidated
statements of loss, stockholder's equity and cash flows for each of the three
years in the period ended March 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of McDermott
Incorporated at March 31, 1995 and 1994, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
March 31, 1995, in conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the Company has
provided for estimated future costs for non-employee products liability asbestos
claims. Inherent in the estimate of such future costs are assumptions which may
vary significantly as claims are filed and settled. Accordingly, the ultimate
loss may differ materially from amounts provided in the consolidated financial
statements.
As discussed in Note 1 to the consolidated financial statements, the Company
changed its methods of accounting for postemployment benefits and investment
securities in 1995, recoveries of products liability claims in 1994, and income
taxes and postretirement benefits other than pensions in 1993.
ERNST & YOUNG LLP
New Orleans, Louisiana
May 24, 1995
25
<PAGE> 30
MCDERMOTT INCORPORATED
CONSOLIDATED BALANCE SHEET
MARCH 31, 1995 AND 1994
ASSETS
<TABLE>
<CAPTION>
1995 1994
---- ----
(In thousands)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 21,014 $ 47,364
Short-term investments 130,195 989
Accounts receivable - trade 233,005 255,441
Accounts receivable - other 54,655 86,362
Accounts receivable from McDermott
International, Inc. 19,493 11,428
Insurance recoverable - current 111,188 110,200
Contracts in progress 223,262 214,649
Inventories 61,714 66,214
Deferred income taxes 74,643 98,627
Other current assets 6,840 7,887
- -------------------------------------------------------------------------------------------------------------
Total Current Assets 936,009 899,161
- -------------------------------------------------------------------------------------------------------------
Property, Plant and Equipment, at Cost:
Land 15,580 31,322
Buildings 171,319 193,588
Machinery and equipment 488,373 1,158,693
Property under construction 30,217 35,895
- -------------------------------------------------------------------------------------------------------------
705,489 1,419,498
Less accumulated depreciation 402,500 935,382
- -------------------------------------------------------------------------------------------------------------
Net Property, Plant and Equipment 302,989 484,116
- -------------------------------------------------------------------------------------------------------------
Investments 231,701 130,121
- -------------------------------------------------------------------------------------------------------------
Insurance Recoverable 750,219 876,846
- -------------------------------------------------------------------------------------------------------------
Investment in McDermott International, Inc. 605,242 610,392
- -------------------------------------------------------------------------------------------------------------
Excess of Cost Over Fair Value of Net
Assets of Purchased Businesses Less Accumulated
Amortization of $90,923,000 at March 31, 1995
and $84,170,000 at March 31, 1994 136,311 143,064
- -------------------------------------------------------------------------------------------------------------
Prepaid Pension Costs 248,718 225,239
- -------------------------------------------------------------------------------------------------------------
Other Assets 175,240 131,787
- -------------------------------------------------------------------------------------------------------------
TOTAL $ 3,386,429 $ 3,500,726
=============================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
26
<PAGE> 31
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDER'S EQUITY 1995 1994
---- ----
<S> <C> <C>
Current Liabilities:
Notes payable and current maturities of long-term debt $ 296,718 $ 21,528
Accounts payable 132,799 141,412
Accounts payable to McDermott
International, Inc. 51,789 17,373
Environmental and products liabilities - current 133,280 122,361
Accrued employee benefits 83,078 93,487
Accrued interest 23,456 44,619
Accrued liabilities - other 105,304 109,844
Advance billings on contracts 117,584 135,505
U.S. and foreign income taxes 13,581 52,866
- -------------------------------------------------------------------------------------------------------------
Total Current Liabilities 957,589 738,995
- -------------------------------------------------------------------------------------------------------------
Long-Term Debt 423,150 584,532
- -------------------------------------------------------------------------------------------------------------
Accumulated Postretirement Benefit Obligation 371,707 370,828
- -------------------------------------------------------------------------------------------------------------
Environmental and Products Liabilities 913,939 1,013,251
- -------------------------------------------------------------------------------------------------------------
Other Liabilities 128,258 124,345
- -------------------------------------------------------------------------------------------------------------
Contingencies
- -------------------------------------------------------------------------------------------------------------
Redeemable Preferred Stocks:
Series A $2.20 cumulative convertible, $1.00 par value;
at redemption value 88,089 88,089
Series B $2.60 cumulative, $1.00 par value;
at redemption value 91,162 108,583
- -------------------------------------------------------------------------------------------------------------
Total Redeemable Preferred Stocks 179,251 196,672
- -------------------------------------------------------------------------------------------------------------
Stockholder's Equity:
Common stock, par value $1.00 per share, 3,700 shares
authorized and issued, 3,600 shares outstanding 4 4
Capital in excess of par value 620,981 589,085
Deficit (193,341) (104,859)
Minimum pension liability (39) (620)
Currency translation adjustments (15,070) (11,507)
- -------------------------------------------------------------------------------------------------------------
Total Stockholder's Equity 412,535 472,103
- -------------------------------------------------------------------------------------------------------------
TOTAL $ 3,386,429 $ 3,500,726
=============================================================================================================
</TABLE>
27
<PAGE> 32
McDERMOTT INCORPORATED
CONSOLIDATED STATEMENT OF LOSS
FOR THE THREE FISCAL YEARS ENDED MARCH 31, 1995
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Revenues $ 2,222,390 $ 2,243,366 $ 1,969,622
- ---------------------------------------------------------------------------------------------------------------
Costs and Expenses:
Cost of operations (before depreciation
and amortization) 2,031,884 1,985,589 1,707,886
Depreciation and amortization 66,104 66,825 82,597
Selling, general and
administrative expenses 176,351 168,039 147,321
- ---------------------------------------------------------------------------------------------------------------
2,274,339 2,220,453 1,937,804
- ---------------------------------------------------------------------------------------------------------------
(51,949) 22,913 31,818
Equity in Income of Investees 10,334 9,080 6,655
- ---------------------------------------------------------------------------------------------------------------
Operating Income (Loss) (41,615) 31,993 38,473
- ---------------------------------------------------------------------------------------------------------------
Other Income (Expense):
Interest income 12,686 5,542 6,272
Interest expense (41,336) (53,870) (75,145)
Other-net (33,004) (9,066) (2,237)
- ---------------------------------------------------------------------------------------------------------------
(61,654) (57,394) (71,110)
- ---------------------------------------------------------------------------------------------------------------
Loss before Provision for (Benefit from)
Income Taxes, Extraordinary Items and
Cumulative Effect of Accounting Changes (103,269) (25,401) (32,637)
Provision for (Benefit from) Income Taxes (29,389) 915 (5,558)
- ---------------------------------------------------------------------------------------------------------------
Loss before Extraordinary Items and Cumulative
Effect of Accounting Changes (73,880) (26,316) (27,079)
Extraordinary Items - - (10,431)
Cumulative Effect of Accounting Changes (512) (100,750) (236,315)
- ---------------------------------------------------------------------------------------------------------------
Net Loss $ (74,392) $ (127,066) $ (273,825)
===============================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements. Significant related
party transactions are disclosed in Note 6.
28
<PAGE> 33
MCDERMOTT INCORPORATED
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
FOR THE THREE FISCAL YEARS ENDED MARCH 31, 1995
<TABLE>
<CAPTION>
Capital Retained Minimum Currency Total
Common in Excess Earnings Pension Translation Stockholder's
Stock(1) of Par Value (Deficit) Liability Adjustments Equity
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance March 31, 1992 $ 4 $ 356,802 $ 327,636 $ (1,160) $ 291 $ 683,573
Net loss (273,825) (273,825)
Preferred stock dividends (15,885) (15,885)
Minimum pension liability 1,155 1,155
Translation adjustments (5,527) (5,527)
- -----------------------------------------------------------------------------------------------------------------------------
Balance March 31, 1993 4 356,802 37,926 (5) (5,236) 389,491
- -----------------------------------------------------------------------------------------------------------------------------
Capital contributions from
McDermott International,
Inc.
Cash 100,000 100,000
Investments, including
accrued interest 132,283 132,283
Net loss (127,066) (127,066)
Preferred stock dividends (15,719) (15,719)
Minimum pension liability (615) (615)
Translation adjustments (6,271) (6,271)
- -----------------------------------------------------------------------------------------------------------------------------
Balance March 31, 1994 4 589,085 (104,859) (620) (11,507) 472,103
- -----------------------------------------------------------------------------------------------------------------------------
Adoption of SFAS 115 (1,480) (1,480)
Sale of marine construction
services business
to International 29,015 29,015
Redemption of preferred
shares 239 239
Tax benefit on exercise of
stock options 2,642 2,642
Net loss (74,392) (74,392)
Preferred stock dividends (14,142) (14,142)
Minimum pension liability 581 581
Net unrealized gain on
investments 1,532 1,532
Translation adjustments (3,563) (3,563)
- -----------------------------------------------------------------------------------------------------------------------------
Balance March 31, 1995 $ 4 $ 620,981 $ (193,341) $ (39) $ (15,070) $ 412,535
=============================================================================================================================
</TABLE>
(1) There were 3,600 common shares outstanding at March 31, 1995, 1994, and
1993 consisting of 3,000 voting shares entitled to 12,000 votes per
share and 600 non-voting shares.
See accompanying notes to the consolidated financial statements.
29
<PAGE> 34
McDERMOTT INCORPORATED
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE FISCAL YEARS ENDED MARCH 31, 1995
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net Loss $ (74,392) $(127,066) $ (273,825)
- ----------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net loss
to net cash provided by (used in) operating
activities:
Depreciation and amortization 66,104 66,825 82,597
Gain on sale and disposal of assets (1,527) (904) (24,452)
Cumulative effect of accounting changes 512 100,750 236,315
Extraordinary items - - 10,431
Provision for deferred taxes 1,869 746 1,379
Other 3,001 327 1,837
Changes in assets and liabilities, net of effects
of acquisition and divestitures:
Accounts receivable 20,425 (13,571) 46,296
Accounts payable 44,345 8,361 5,369
Inventories 788 1,738 9,720
Net contracts in progress and advance billings (33,044) 29,470 53,206
Income taxes (48,989) 4,215 (75,355)
Accrued interest (21,163) (7,666) (52,931)
Accrued liabilities 3,497 (41,631) 5,253
Other, net 16,333 8,682 (37,269)
Proceeds from insurance for products liability claims 105,314 103,994 106,252
Payments of products liabilities claims (126,151) (112,271) (94,304)
- ----------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES (43,078) 21,999 519
- ----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of Delta Catalytic Corporation - (28,249) -
Proceeds from sale and disposal of assets 13,171 3,712 64,048
Purchases of property, plant and equipment (71,793) (62,650) (57,667)
Net purchases of short-term investments
and government obligations (96) (497) (474)
Purchases of government obligations, under reverse
repurchase agreements with affiliates - (674,203) (6,033,975)
Sales of government obligations, under reverse
repurchase agreements with affiliates - 753,063 6,102,052
Proceeds from redemption of International stock 2,500 2,500 2,500
Investment in equity investees (10,190) (979) (2,549)
Other (49) - -
- ----------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES (66,457) (7,303) 73,935
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
30
<PAGE> 35
Continued
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
(In thousands)
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of long-term debt $(16,707) $(207,646) $(105,463)
Issuance of long-term debt - 92,841 89,000
Increase (decrease) in short-term borrowing 130,811 (4,580) -
Dividends paid (14,142) (15,719) (15,885)
Capital contribution from International - 100,000 -
Redemption of preferred stock (17,182) (7,810) -
Other (75) 5,034 (1,656)
- ----------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES 82,705 (37,880) (34,004)
- -----------------------------------------------------------------------------------------------------------
EFFECTS OF EXCHANGE RATE CHANGES ON CASH 480 (1,001) (324)
- ----------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (26,350) (24,185) 40,126
- ----------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR 47,364 71,549 31,423
- ----------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END
OF YEAR $ 21,014 $ 47,364 $ 71,549
================================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amount capitalized) $ 62,623 $ 61,539 $ 128,079
Income taxes (net of refunds) $ (11,705) $ 3,483 $ 68,372
================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
31
<PAGE> 36
MCDERMOTT INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE FISCAL YEARS ENDED MARCH 31, 1995
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of McDermott
Incorporated and all subsidiaries. Investments in joint venture and other
entities in which McDermott Incorporated has a 20% to 50% interest are accounted
for on the equity method. Differences between the cost of equity method
investments and the amount of underlying equity in net assets of the investees
are amortized systematically to income. All significant intercompany
transactions and accounts have been eliminated. Certain amounts previously
reported have been reclassified to conform with the presentation at March 31,
1995.
Unless the context otherwise requires, hereinafter, the "Delaware Company" will
be used to mean McDermott Incorporated and its consolidated subsidiaries
(including Babcock & Wilcox Investment Company and its principal subsidiary, The
Babcock & Wilcox Company), and "International" will be used to mean McDermott
International, Inc., a Panamanian corporation. International is the parent
company of the Delaware Company.
Changes in Accounting Policies
Products Liabilities - As a result of the consensus reached on Emerging
Issues Task Force ("EITF") Issue No. 93-5, a company is no longer permitted to
offset, for recognition purposes, reasonably possible recoveries against
probable losses which until fiscal year 1994 had been the Delaware Company's
practice with respect to estimated future costs for non-employee products
liability asbestos claims. During the third quarter of fiscal year 1994, and
effective April 1, 1993, the Delaware Company adopted this provision of EITF
Issue No. 93-5 as a change in accounting principle and provided for estimated
future costs to the extent that recovery from its insurers was not determined to
be probable. The cumulative effect of the accounting change at April 1, 1993 was
a charge of $100,750,000 (net of income taxes of $54,250,000). The adoption of
this provision of EITF Issue No. 93-5 resulted in a decrease in pretax Loss
before Cumulative Effect of Accounting Change of $19,947,000 ($12,168,000, net
of tax) in fiscal year 1994, as costs in fiscal year 1994 that would have been
recognized under the Delaware Company's prior practice were included in the
cumulative effect of the accounting change (see Note 11). Prior to the adoption
of EITF Issue No. 93-5, the Delaware Company had not made calculations in
similar detail to those required to adopt EITF Issue No. 93-5 and determined at
the time of adoption of EITF Issue No. 93-5 that it was not practical to do so
retroactively. Events giving rise to the liability for non-employee product
liability asbestos claims occurred prior to 1987 and the Delaware Company had
concluded in all earlier periods, based upon information then currently
available, that is was adequately insured against future non-employee products
liability asbestos claims. Therefore, because the amounts were not available and
because of the inherent complexities in making reliable determinations at an
32
<PAGE> 37
earlier point in time consistent with the methods used in the April 1, 1993
determination, pro forma amounts reflecting the retroactive application of the
accounting change for fiscal year 1993 are not presented.
During the first quarter of fiscal year 1995, the Delaware Company adopted the
provisions of Financial Accounting Standards Board ("FASB") Interpretation No.
39, which required the Delaware Company to present separately in the balance
sheet its estimated liabilities for pending and future non-employee products
liability asbestos claims and related estimated insurance recoveries.
Accordingly, the accompanying consolidated balance sheet at March 31, 1994 and
the consolidated statement of cash flows for the years ended March 31, 1994 and
1993 have been restated to conform to the March 31, 1995 presentation. The
adoption of FASB Interpretation No. 39 did not have any effect on earnings.
Postemployment Benefits - Effective April 1, 1994, the Delaware Company
adopted Statement of Financial Accounting Standards ("SFAS") No. 112,
"Employers' Accounting for Postemployment Benefits," in accounting for
disability benefits and other types of benefits paid to employees, their
beneficiaries and covered dependents after active employment, but before
retirement. The cumulative effect as of April 1, 1994 of this change in
accounting was to increase net loss by $512,000 (net of income taxes of
$287,000). Other than the cumulative effect, the accounting change had no
material effect on the results of continuing operations of fiscal year 1995.
Prior to April 1, 1994, the Delaware Company recognized the cost of providing
most of these benefits on a cash basis. Under this new principle of accounting,
the cost of these benefits is accrued when it becomes probable that such
benefits will be paid and when sufficient information exists to make reasonable
estimates of the amounts to be paid. In accordance with the Statement, prior
period financial statements have not been restated to reflect this change in
accounting principle.
Postretirement Health Care Benefits - Effective April 1, 1992, the Delaware
Company adopted SFAS No. 106, "Employers' Accounting for Postretirement Benefits
Other Than Pensions." In accordance with the Statement, the Delaware Company
elected immediate recognition of its transition obligation and recorded
$240,042,000 (net of income tax benefit of $136,228,000) as the cumulative
effect of an accounting change. In fiscal year 1993, other than the cumulative
effect of the accounting change, the adoption of SFAS No. 106 resulted in an
increase in Loss before Extraordinary Items and Cumulative Effect of Accounting
Changes of $4,460,000.
Investments - Effective April 1, 1994, the Delaware Company adopted SFAS
No. 115, "Accounting for Certain Investments in Debt and Equity Securities" for
investments held as of or acquired after April 1, 1994. The adoption of SFAS No.
115 resulted in a decrease in the opening balance of stockholder's equity of
$1,480,000 to reflect the net unrealized holding losses on the Delaware
Company's investment securities which were previously carried at amortized cost.
In accordance with the Statement, prior period financial statements have not
been restated to reflect this change in accounting principle.
At March 31, 1995, the Delaware Company had investments in government
obligations and other debt securities. These investments are classified as
available for sale and are carried at fair value, with the unrealized gains and
losses, net of tax, reported in a separate component of shareholder's equity.
Management determines the appropriate classifications of debt
33
<PAGE> 38
securities at the time of purchase and reevaluates such designation as of each
balance sheet date. Investment securities available for current operations are
classified in the balance sheet as current assets while securities held for
long-term investment purposes are classified as non-current assets. The
amortized cost of debt securities is adjusted for amortization of premiums and
accretion of discounts to maturity. Such amortization is included in interest
income. Realized gains and losses are included in income. The cost of securities
sold is based on the specific identification method. Interest on securities is
included in interest income.
Income Taxes - Income taxes have been provided using the liability method in
accordance with SFAS No. 109, "Accounting for Income Taxes," which was adopted
effective April 1, 1992. The cumulative effect of the accounting change on prior
years at April 1, 1992 was a benefit of $3,727,000. Other than the cumulative
effect, the accounting change had no material effect on fiscal year 1993.
Foreign Currency Translation
Assets and liabilities of foreign operations, other than operations in highly
inflationary economies, are translated into U. S. Dollars at current exchange
rates and income statement items are translated at average exchange rates for
the year. Adjustments resulting from the translation of foreign currency
financial statements are recorded in a separate component of equity. Foreign
currency transaction adjustments are reported in income. Included in Other
Income (Expense) are transaction gains (losses) of $(384,000), $1,695,000, and
($47,000) for fiscal years 1995, 1994 and 1993, respectively.
Contracts and Revenue Recognition
Contract revenues and related costs are principally recognized on a percentage
of completion method for individual contracts or components thereof based upon
work performed or a cost to cost method, as applicable to the product or
activity involved. Revenues and related costs so recorded, plus accumulated
contract costs that exceed amounts invoiced to customers under the terms of the
contracts, are included in Contracts in Progress. Billings that exceed
accumulated contract costs and revenues and costs recognized under percentage of
completion are included in Advance Billings on Contracts. Most long-term
contracts have provisions for progress payments. Contract price and cost
estimates are reviewed periodically as the work progresses and adjustments
proportionate to the percentage of completion are reflected in income in the
period when such estimates are revised. There are no unbilled revenues which
will not be billed. Provisions are made currently for all known or anticipated
losses. Claims for extra work or changes in scope of work are included in
contract revenues when collection is probable. Included in Accounts Receivable
and Contracts in Progress are approximately $46,717,000 and $51,337,000 relating
to commercial and U. S. Government contracts claims whose final settlement is
subject to future determination through negotiations or other procedures which
had not been completed at March 31, 1995 and 1994, respectively.
34
<PAGE> 39
<TABLE>
<CAPTION>
1995 1994
-------------- -------------
(In thousands)
<S> <C> <C>
Included in Contracts in Progress are:
Costs Incurred less costs of revenue recognized $ 24,853 $ 85,411
Revenues recognized less billings to customers 198,409 129,238
- -------------------------------------------------------------------------------------------------------------
Contracts in Progress $ 223,262 $ 214,649
=============================================================================================================
Included in Advance Billings on Contracts are:
Billings to customer less revenues recognized $ 144,430 $ 148,430
Costs incurred less cost of revenue recognized (26,846) (12,925)
- -------------------------------------------------------------------------------------------------------------
Advance Billings on Contracts $ 117,584 $ 135,505
=============================================================================================================
</TABLE>
The Delaware Company is usually entitled to financial settlements relative to
the individual circumstances of deferrals or cancellations of Power Generation
Systems and Equipment contracts. The Delaware Company does not recognize such
settlements or claims for additional compensation until final settlement is
reached.
Included in accounts receivable - trade are amounts representing retainages on
contracts as follows:
<TABLE>
<CAPTION>
1995 1994
-------------- --------------
(In thousands)
<S> <C> <C>
Retainages $ 51,393 $ 69,668
==============================================================================================================
Retainages expected to be collected after one year $ 41,355 $ 39,370
==============================================================================================================
</TABLE>
Of its long-term retainages at March 31, 1995, the Delaware Company anticipates
collection as follows: $23,790,000 in fiscal year 1997, $15,768,000 in fiscal
year 1998, $284,000 in fiscal year 1999 and $1,513,000 in fiscal year 2000.
Inventories
Inventories are carried at the lower of cost or market. Cost is determined on an
average cost basis except for certain materials inventories, for which the
last-in-first-out (LIFO) method is used. The cost of approximately 18% and 22%
of total inventories was determined using the LIFO method at March 31, 1995 and
1994, respectively. Consolidated inventories at March 31, 1995 and 1994 are
summarized below:
<TABLE>
<CAPTION>
1995 1994
-------------- --------------
(In thousands)
<S> <C> <C>
Raw Materials and Supplies $ 36,579 $ 40,281
Work in Progress 15,341 17,566
Finished Goods 9,794 8,367
- --------------------------------------------------------------------------------------------------------------
$ 61,714 $ 66,214
==============================================================================================================
</TABLE>
35
<PAGE> 40
Warranty Expense
Estimated warranty expense which may be required to satisfy contractual
requirements, primarily of the Power Generation Systems and Equipment segment,
is accrued relative to revenue recognition on the respective contracts. In
addition, specific provisions are made where the costs of warranty are expected
to significantly exceed such accruals.
Environmental Clean-up Costs
The Delaware Company accrues for future decommissioning and decontamination of
its nuclear facilities that will permit the release of these facilities to
unrestricted use at the end of each facility's life, which is a condition of its
licenses from the Nuclear Regulatory Commission ("NRC"). Such accruals are based
on the estimated cost of those activities over the economic useful life of each
facility, which is estimated at 40 years.
Research and Development
The cost of research and development which is not performed on specific
contracts is charged to operations as incurred. Such expense was approximately
$19,455,000, $19,583,000 and $18,914,000 in fiscal years 1995, 1994 and 1993,
respectively. In addition, expenditures on research and development activities
of approximately $44,240,000, $48,112,000 and $42,082,000 in fiscal years 1995,
1994 and 1993, respectively, were paid for by customers of the Delaware Company.
Depreciation, Maintenance and Repairs
Property, plant and equipment is depreciated on the straight-line method, using
estimated economic useful lives of 8 to 40 years for buildings and 2 to 28 years
for machinery and equipment. Maintenance, repairs and renewals which do not
materially prolong the useful life of an asset are expensed as incurred.
Amortization of Excess of Cost Over Fair Value of Net Assets of Purchased
Businesses
Excess of the cost over fair value of net assets of purchased businesses
pertains to the acquisition of The Babcock & Wilcox Company, which is being
amortized on a straight-line basis over forty years and the acquisition of Delta
Catalytic Corporation (See Note 3) which is being amortized on a straight-line
basis over ten years. Management periodically reviews goodwill to assess
recoverability, and impairments would be recognized in operating results if a
permanent diminution in value were to occur.
Capitalization of Interest Cost
In fiscal years 1995, 1994 and 1993, total interest cost incurred was
$43,919,000, $55,187,000 and $76,808,000, respectively, of which $2,583,000,
$1,317,000 and $1,663,000, respectively, was capitalized.
Cash Equivalents
Cash equivalents are highly liquid investments, with maturities of three months
or less when purchased, which are not held as part of the investment portfolio.
36
<PAGE> 41
Derivative Financial Instruments
Derivatives, primarily forward exchange contracts, are utilized by the Delaware
Company to minimize exposure and reduce risk from foreign exchange fluctuations
in the regular course of business. Gains and losses related to qualifying hedges
of firm commitments are deferred and are recognized in income or as adjustments
of carrying amounts when the hedged transactions occur. Gains and losses on
forward exchange contracts which hedge foreign currency assets or liabilities
are recognized in income as incurred. Such amounts effectively offset gains and
losses on the foreign currency assets or liabilities that are hedged.
NOTE 2 - SALE OF MARINE CONSTRUCTION SERVICES BUSINESSES
In connection with the merger of Offshore Pipelines, Inc. into J. Ray McDermott,
S.A, a subsidiary of International, on January 31, 1995, the Delaware Company
sold a portion of its marine construction services business having a net book
value of $187,622,000 (which includes property, plant and equipment of
$190,780,000) to International and received marketable securities having an
aggregate fair value of $230,173,000. The excess of the sales price over the net
book value of net assets sold to International of $29,015,000 (net of tax of
$13,536,000) has been included in Capital in Excess of Par Value.
Revenues and operating income of the portion of the marine construction services
business sold were as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Revenues $ 243,959 $ 295,125 $ 320,356
Operating income $ 7,324 $ 22,752 $ 10,502
</TABLE>
37
<PAGE> 42
NOTE 3 - ACQUISITION OF DELTA CATALYTIC CORPORATION
During June 1993, the Delaware Company acquired a controlling interest in Delta
Catalytic Corporation ("DCC") of Calgary, Alberta, Canada for $28,249,000. The
Delaware Company has reached an agreement to purchase the remaining portion of
DCC in fiscal year 1996. DCC provides engineering, procurement, construction and
maintenance services to industries worldwide; including oil, gas, marine
construction and hydrocarbon processing. The acquisition was accounted for by
the purchase method of accounting and, accordingly, the purchase price has been
allocated to the underlying assets and liabilities based on fair values as of
the date of acquisition. The excess of cost over fair value of net assets
acquired is being amortized over a period of 10 years. The operating results
have been included in the Consolidated Statement of Loss from the acquisition
date. A summary of the purchase price allocation follows:
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
Net Working Capital $ 10,531
Excess of Cost Over Fair Value of Net Assets
of Purchased Business 17,170
Net Property, Plant and Equipment 14,887
Other Non-Current Liabilities, Net (14,339)
- -----------------------------------------------------------------------------------------------------------
Total $ 28,249
===========================================================================================================
</TABLE>
The following unaudited results of operations assume the acquisition of DCC had
occurred as of the beginning of the periods presented:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
3/31/94 3/31/93
------- -------
(Unaudited)
(In thousands)
<S> <C> <C>
Revenues $ 2,312,853 $ 2,470,392
Loss from Continuing Operations before
Extraordinary Items and Cumulative Effect
of Accounting Changes $ (25,989) $ (26,635)
Net Loss $ (126,739) $ (273,381)
</TABLE>
The pro forma financial information is presented for informational purposes only
and is not necessarily indicative of the operating results that would have
occurred had the acquisition of DCC been consummated as of the above dates, nor
is it necessarily indicative of future operating results.
38
<PAGE> 43
NOTE 4 - INVESTMENTS IN JOINT VENTURES AND OTHER ENTITIES
Investments in entities which are accounted for on the equity method were
$35,524,000 and $27,695,000 at March 31, 1995 and 1994, respectively.
Transactions with entities for which investments are accounted for on the equity
method included sales to ($5,693,000, $5,443,000 and $5,909,000 in fiscal years
1995, 1994 and 1993, respectively) and purchases from ($195,000, $3,510,000 and
$330,000 in fiscal years 1995, 1994 and 1993, respectively) these entities.
Dividends received from unconsolidated investees were $9,681,000. $5,749,000 and
$4,083,000 in fiscal years 1995, 1994 and 1993, respectively. Undistributed
earnings in unconsolidated affiliates were $11,339,000 and $8,731,000,
respectively, at March 31, 1995 and 1994.
On March 30, 1993, the Delaware Company sold its remaining interests in its B&W
Fuel Company and B&W Nuclear Service Company for $10,150,000 and $32,440,000,
respectively. Included in Other-net were gains on the sales of $23,968,000 in
fiscal year 1993.
Summarized combined balance sheet and income statement information based on the
most recent financial information for equity investments in joint ventures and
other entities (25% to 50% owned) are presented below:
<TABLE>
<CAPTION>
1995 1994
---- ----
(In thousands)
<S> <C> <C>
Current Assets $ 103,941 $ 70,342
Non-Current Assets 341,425 254,386
- --------------------------------------------------------------------------------------------------------------
Total Assets $ 445,366 $ 324,728
==============================================================================================================
Current Liabilities $ 79,817 $ 69,373
Non-Current Liabilities 269,173 165,885
Owners' Equity 96,376 89,470
- --------------------------------------------------------------------------------------------------------------
Total Liabilities and Owners'
Equity $ 445,366 $ 324,728
==============================================================================================================
</TABLE>
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Revenues $ 221,438 $ 147,394 $ 60,519
Gross Profit $ 67,116 $ 23,253 $ 39,473
Income before Provision
for Income Taxes $ 32,729 $ 13,117 $ 14,094
Provision for Income Taxes 3,581 2,672 410
- -------------------------------------------------------------------------------------------------------------
Net Income $ 29,148 $ 10,445 $ 13,684
=============================================================================================================
</TABLE>
39
<PAGE> 44
NOTE 5 - INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the financial and tax bases of assets and liabilities. Significant
components of deferred tax assets and liabilities as of March 31, 1995 and 1994
were as follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
(In thousands)
<S> <C> <C>
Deferred tax assets:
Accrued warranty expense $ 12,796 $ 11,745
Accrued vacation pay 8,574 9,726
Accrued liabilities for self-insurance (including
postretirement health care benefits) 167,454 188,278
Accrued liabilities for executive and
employee incentive compensation 16,103 14,145
Accrued interest on proposed tax deficiencies 4,071 11,874
Long-term contracts - 29,957
Investments in joint ventures and affiliated companies 7,317 7,111
Environmental and products liabilities 410,588 442,241
Other 31,173 31,776
- ------------------------------------------------------------------------------------------------------------
Total deferred tax assets 658,076 746,853
Valuation allowance for deferred
tax assets (13,852) (10,239)
- ------------------------------------------------------------------------------------------------------------
Net deferred tax assets 644,224 736,614
- ------------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Property, plant and equipment 29,006 79,779
Prepaid pension costs 94,834 89,215
Investments in joint ventures and affiliated companies 27,346 28,056
Insurance recoverable 336,429 384,948
Other 7,429 2,197
- ------------------------------------------------------------------------------------------------------------
Total deferred tax liabilities 495,044 584,195
- ------------------------------------------------------------------------------------------------------------
Net deferred tax assets $ 149,180 $ 152,419
============================================================================================================
</TABLE>
Loss before provision for (benefit from) income taxes, extraordinary items and
cumulative effect of accounting changes was as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
(In thousands)
<S> <C> <C> <C>
U. S. $ (120,005) $ (57,555) $ (40,004)
Other than U. S. 16,736 32,154 7,367
- ------------------------------------------------------------------------------------------------------------
$ (103,269) $ (25,401) $ (32,637)
============================================================================================================
</TABLE>
40
<PAGE> 45
The provision for (benefit from) income taxes consists of:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Current:
Federal $ (36,266) $ (15,083) $ (9,636)
State and local (4,405) 1,804 630
Foreign 9,413 13,448 2,069
- ------------------------------------------------------------------------------------------------------------
Total current (31,258) 169 (6,937)
- ------------------------------------------------------------------------------------------------------------
Deferred:
Federal 916 1,268 (289)
State and local 2,776 (4,392) 1,115
Foreign (1,823) 3,870 553
- ------------------------------------------------------------------------------------------------------------
Total deferred 1,869 746 1,379
- ------------------------------------------------------------------------------------------------------------
Provision for (Benefit from) Income Taxes $ (29,389) $ 915 $ (5,558)
============================================================================================================
</TABLE>
The effective income tax rate is reconciled to the statutory federal income tax
rate as follows:
<TABLE>
<CAPTION>
1995 1994 1993
PERCENT PERCENT PERCENT
-------- ------- -------
<S> <C> <C> <C>
Statutory federal tax rate (35.0) (35.0) (34.0)
State and local income tax effect (0.6) 0.8 3.5
Foreign operations 1.9 15.3 2.8
Excess of cost over fair value of net assets
of The Babcock & Wilcox Company 2.3 8.7 5.3
Non-deductible business expenses 1.2 3.0 2.5
Dividends from affiliates 1.8 7.4 5.8
Tax benefit of NOL utilization - - (4.6)
Minority interest (0.5) 3.3 1.0
Other 0.4 0.1 0.7
- ------------------------------------------------------------------------------------------------------------
Effective Income Tax Rate (28.5) 3.6 (17.0)
============================================================================================================
</TABLE>
Undistributed earnings of consolidated foreign subsidiaries amounted to
approximately $56,800,000 at March 31, 1995. These earnings are considered to be
indefinitely reinvested and, accordingly, no provision for U.S. federal and
state and local income taxes has been provided. Upon distribution of those
earnings, the Delaware Company would be subject to both U.S. income taxes
(subject to an adjustment for foreign tax credits) and withholding taxes payable
to the foreign jurisdictions. The unrecognized deferred income tax liability is
estimated to be approximately $22,100,000. Withholding taxes of $5,300,000 would
be payable upon remittance of all previously unremitted earnings at March 31,
1995.
During fiscal year 1995, a settlement was reached with the Internal Revenue
Service ("IRS") concerning the Delaware Company's U.S. income tax liability for
the fiscal years ended March 31, 1983 through March 31, 1986 disposing of all
U.S. Federal income tax issues for those years.
41
<PAGE> 46
A settlement was also reached for the fiscal years ended March 31, 1987 and
March 31, 1988 disposing of all U.S. Federal income tax issues for those years
and is pending approval by the joint committee of taxation. These settlements
resulted in a reduction in accrued interest expense of $26,300,000. The IRS has
issued notices for fiscal years ended March 31, 1989 and March 31, 1990
asserting deficiencies in the amount of taxes reported. The deficiencies are
based on issues substantially similar to those of earlier years. The Delaware
Company believes that any income taxes ultimately assessed will not exceed
amounts already provided.
NOTE 6 - RELATED PARTY TRANSACTIONS
The Delaware Company has material transactions with International and its other
subsidiaries occurring in the normal course of operations. Transactions which
are included in the Delaware Company's revenues include the sales of engineering
and design services and fabrication services ($13,257,000, $7,415,000, and
$45,832,000 in fiscal years 1995, 1994 and 1993 respectively) and the leasing of
equipment ($4,215,000, $16,107,000, and $25,195,000, in fiscal years 1995, 1994
and 1993, respectively). Other transactions include the allocation of general
and administrative and other costs to International ($7,309,000, $8,491,000 and
$8,304,000 in fiscal years 1995, 1994 and 1993, respectively), placing certain
insurance coverage (at prices determined on an annual basis of $28,024,000,
$24,582,000, and $18,096,000 in fiscal years 1995, 1994 and 1993, respectively)
through commercial insurance carriers which in turn substantially reinsure such
exposure to a wholly-owned subsidiary of International, and the management of
certain of the investments of the Delaware Company and its pension plans by a
wholly-owned subsidiary of International for which the Delaware Company paid
fees of $2,949,000, $2,528,000 and $2,451,000 in fiscal years 1995, 1994 and
1993, respectively.
Effective February 1, 1989, the Delaware Company and a subsidiary of
International, McDermott International Investments Co., Inc., ("MIICO"), entered
into a reverse repurchase agreement whereby either party acting as a "buyer"
would purchase for cash certain U. S. Government obligations owned by the other
party acting as a "seller", and, at the date of purchase, the "seller" would
agree to repurchase the same securities at a set price (including accrued
interest) at a future specified date. At March 31, 1995 and 1994, there were no
obligations outstanding under the agreement. Interest income recognized from
these reverse repurchase agreements was $560,000 and $3,545,000 for fiscal years
1994 and 1993, respectively.
The Delaware Company and MIICO are parties to an agreement pursuant to which the
Delaware Company may borrow up to $150,000,000. There were no borrowings against
this agreement at March 31, 1995 or 1994.
At March 31, 1994, property, plant and equipment and accumulated depreciation
included $376,266,000 and 270,813,000, respectively, of marine equipment which
was leased by the Delaware Company to International. In fiscal year 1995, the
equipment was sold to International in connection with the merger of Offshore
Pipelines, Inc. into J. Ray McDermott, S.A.
Under a reorganization during the fiscal year ended March 31, 1983,
International became the parent of the McDermott group of companies, which
includes the Delaware Company which prior to the reorganization was the parent
company. The Delaware Company's investment in International represents its right
to the undistributed earnings of International existing at the time of the
reorganization less subsequent distributions by International to the Delaware
Company.
42
<PAGE> 47
In order to preserve the Delaware Company's right to the undistributed earnings
and provide for the distribution of such earnings to the Delaware Company should
either the Delaware Company or International elect not to keep these earnings
invested with International, the Delaware Company retained its ownership of
100,000 shares of International Common Stock, received 100,000 shares of
International Series A Participating Preferred Stock and 100,000 shares of
International Series B Non-Voting Preferred Stock, and entered into a stock
purchase and sale agreement with International (the "Intercompany Agreement").
Both Series A and Series B Preferred Stocks have certain rights in the event of
liquidation of International. Series B Preferred Stock is currently callable by
International at $275 per share and 10,000 shares are to be redeemed by
International each year at $250 per share. Such redemption began in November
1992. The Series A and Series B Preferred Stocks are entitled to annual per
share dividends of $10 (but no more than ten times the amount of per share
dividends paid by International on its Common Stock) and $20, respectively, and
such dividends are cumulative to the extent not paid. Shares of Series A
Preferred Stock are also entitled to additional dividends whenever dividends in
excess of $3 per International Common Share are declared in any fiscal year.
Dividends and proceeds from redemption of Series B Preferred Stock received from
International have been accounted for as a reduction of the Delaware Company's
investment in International.
Pursuant to the Intercompany Agreement, the Delaware Company has the right to
sell to International and International has the right to buy from the Delaware
Company, 100,000 units, each unit consisting of one share of International
Common Stock and one share of International Series A Participating Stock, at a
price based primarily upon the stockholders' equity of McDermott International
at the close of the fiscal year preceding the date at which the right to sell or
buy, as the case may be, is exercised, and, to a limited extent, upon the
price-to-book value of the Dow Jones Industrial Average. If a unit is sold to
International upon the Delaware Company's exercise of its right to sell under
the Intercompany Agreement, the purchase price of such unit will be 90% of the
then current value of the unit (the "current unit value"). If a unit is sold to
International pursuant to an exercise by International of its right to purchase
under the Intercompany Agreement, the purchase price of such unit will be 110%
of the current unit value. At April 1, 1995, the current unit value was $2,649
and the aggregate current unit value for the Delaware Company's 100,000 units
was $264,880,000. Both parties intend to preserve the Delaware Company's right
to the undistributed earnings by not exercising any rights under the
Intercompany Agreement that would result in a loss to the Delaware Company. The
net proceeds to the Delaware Company from the exercise of any rights under the
Intercompany Agreement would be subject to U.S. federal, state and other
applicable taxes. No tax provisions have been established, since there is no
present intention by either party to exercise such rights.
The Delaware Company maintains the Thrift Plan for Employees of McDermott
Incorporated and Participating Subsidiary and Affiliated Companies (the "Thrift
Plan"), which is a defined contribution plan that includes a cash or deferred
arrangement. Monthly employer contributions are equal to 50% of the first 6% of
compensation (as defined in the plan) contributed by participants, and may be
made, at the discretion of the Delaware Company, in cash or in common stock of
International. When monthly employer contributions are made in stock, the
Delaware Company pays cash to International and shares of common stock are
issued to the Thrift Plan from the authorized but unissued share capital of
International. The number of such shares is determined based on the closing
price on the last business day of the month as reported on the New York Stock
Exchange Composite Tape with fractional shares paid in cash. During fiscal
43
<PAGE> 48
years 1995, 1994 and 1993, respectively, 312,883, 300,391 and 347,054 shares
were purchased by the Delaware Company for $7,713,000, $7,984,000 and
$7,989,000.
Certain officers and employees of the Delaware Company participate in certain
benefit plans which involve the issuance of International Common Stock.
NOTE 7 - LONG-TERM DEBT AND NOTES PAYABLE
<TABLE>
<CAPTION>
Long-term debt consists of: 1995 1994
---- ----
(In thousands)
<S> <C> <C>
Unsecured Debt:
Series A Medium-Term Notes (maturities ranging
from 2 to 8 years; interest at
various rates ranging from 7.92% to 9.00%) $ 75,000 $ 75,000
Series B Medium-Term Notes (maturities ranging
from 3 to 28 years; interest at
various rates ranging from 6.50% to 8.75%) 101,000 101,000
9.375% Notes due 2002 ($225,000,000 face value) 224,482 224,432
10.25% Notes due June 1, 1995 150,000 150,000
Other notes payable through 2009 (interest at
various rates ranging to 6.80%) 17,700 17,840
Secured Debt:
Other notes payable through 2012 and
capitalized lease obligations 5,356 22,269
- -----------------------------------------------------------------------------------------------------------------
573,538 590,541
Less: Amounts due within one year 150,388 6,009
- -----------------------------------------------------------------------------------------------------------------
$ 423,150 $ 584,532
=================================================================================================================
</TABLE>
Notes payable and current maturities of long-term debt consist of:
<TABLE>
<CAPTION>
3/31/95 3/31/94
------- -------
<S> <C> <C>
Short-term lines of credit:
Unsecured $ 40,640 $ 15,519
Repurchase Agreements 105,690 -
Current Maturities of long-term debt 150,388 6,009
- -----------------------------------------------------------------------------------------------------------------
$ 296,718 $ 21,528
=================================================================================================================
Weighted average interest rate on short-term borrowings 7.15% 4.45%
=================================================================================================================
</TABLE>
44
<PAGE> 49
The Indenture for the 9.375% Notes due 2002 and the Series A and B Medium Term
Notes, contain certain covenants which restrict the amount of funded
indebtedness that the Delaware Company may incur, and place limitations on
certain restricted payments, certain transactions between affiliates, the
creation of certain liens and the amendment of the Intercompany Agreement.
Maturities of long-term debt during the five fiscal years subsequent to March
31, 1995 are as follows: 1996 - $150,388,000; 1997 - $384,000; 1998 -
$45,201,000; 1999 - $27,165,000; 2000 - $165,000.
The Delaware Company is restricted, as a result of covenants in certain credit
agreements, in its ability to transfer funds to International and its
subsidiaries through cash dividends or through unsecured loans or investments.
At March 31, 1995, substantially all of the net assets of the Delaware Company
were subject to such restrictions. At March 31, 1995, the most restrictive of
these covenants with respect to the payment of dividends by the Delaware Company
would prohibit the payment of dividends other than the current dividends on
existing preferred stock.
Pursuant to its right of redemption, on March 31, 1993, the Delaware Company
deposited cash into trusts for the purpose of redeeming its 9.625% Sinking Fund
Debentures, 10% Subordinated Debentures, and 10.20% Sinking Fund Debentures.
These redemptions resulted in an extraordinary loss of $2,429,000 (net of income
tax benefit of $1,252,000), in fiscal year 1993. Also on March 31, 1993,
pursuant to its redemption option, the Delaware Company provided for the loss
associated with the redemption and extinguishment of its 12.25% Senior
Subordinated Notes due 1998 resulting in an extraordinary loss of $7,392,000
(net of income tax benefit of $3,808,000). Additionally, during October 1992,
the Delaware Company repurchased $10,600,000 aggregate principal amount of its
12.25% Senior Subordinated Notes due 1998 resulting in an extraordinary loss of
$610,000 (net of income tax benefit of $314,000).
At March 31, 1995 and 1994, the Delaware Company and its subsidiaries had
available to them various uncommitted short-term lines of credit from banks
totalling $227,903,000 and $204,699,000, respectively. Borrowings against these
lines of credit at March 31, 1995 and 1994 were $33,220,000 and $15,519,000,
respectively. In addition, The Babcock & Wilcox Company had available to it a
$128,000,000 unsecured and committed revolving line of credit facility. Loans
outstanding under the revolving credit facility may not exceed the banks'
commitments thereunder. In addition, it is a condition to borrowing under the
revolving credit facility that the borrower's consolidated net tangible assets
exceed a certain level. There were no borrowings against this facility at March
31, 1995 or 1994. DCC had available from a certain Canadian bank an unsecured
and committed revolving credit facility of $14,184,000 which expires on May 31,
1997. Borrowings outstanding against this facility at March 31, 1995 were
$7,420,000. There were no borrowings against this facility at March 31, 1994.
The Delaware Company obligations under short-term repurchase agreements at March
31, 1995 were secured by government obligations with a fair value of
$105,066,000 .
45
<PAGE> 50
NOTE 8 - PENSION PLANS AND POSTRETIREMENT BENEFITS
Pension Plans - The Delaware Company provides retirement benefits, primarily
through non-contributory pension plans, for substantially all of its regular
full-time employees, except certain non-resident alien employees of foreign
subsidiaries who are not citizens of a European Community country or who do not
earn income in the United States, Canada, or the United Kingdom. Salaried plan
benefits are based on final average compensation and years of service, while
hourly plan benefits are based on a flat benefit rate and years of service. The
Delaware Company's funding policy is to fund applicable pension plans to meet
the minimum funding requirements of the Employee Retirement Income Security Act
of 1974 (ERISA) and, generally, to fund other pension plans as recommended by
the respective plan actuary and in accordance with applicable law. At January 1,
1995 and 1994, approximately one-half of total plan assets were invested in
listed stocks and bonds. The remaining assets were held in foreign equity funds,
U.S. Government securities and investments of a short-term nature.
U.S. Pension Plans
Net periodic pension benefit for fiscal years 1995, 1994 and 1993 included the
following components:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Service cost - benefits earned during the period $ 22,686 $ 20,268 $ 19,910
Interest cost on projected benefit obligation 62,534 60,610 55,262
Actual return on plan assets 16,701 (162,021) (58,901)
Net amortization and deferral (114,434) 78,928 (26,201)
- -------------------------------------------------------------------------------------------------------------
Net periodic pension benefit $ (12,513) $ (2,215) $ (9,930)
=============================================================================================================
</TABLE>
Due the sale of a domestic entity, loss from operations before cumulative effect
of accounting change in fiscal year 1995, includes a net after-tax gain of
$732,000 resulting from the recognition of a curtailment of a related plan.
46
<PAGE> 51
The following table sets forth the U.S. plans' funded status and amounts
recognized in the consolidated financial statements:
<TABLE>
<CAPTION>
Plans for Which Plans For Which
Assets Exceed Accumulated
Accumulated Benefits
Benefits Exceed Assets
----------------------- ----------------------
1995 1994 1995 1994
---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C>
Actuarial present value of
benefit obligations:
Vested benefit obligation $ 534,093 $ 532,205 $ 132,971 $ 127,717
=============================================================================================================
Accumulated benefit obligation $ 584,938 $ 596,595 $ 161,544 $ 158,830
=============================================================================================================
Projected benefit obligation $ 654,066 $ 690,970 $ 163,816 $ 162,624
Plan assets at fair value 912,329 964,646 117,606 119,493
- -------------------------------------------------------------------------------------------------------------
Projected benefit obligation
(in excess of) or less
than plan assets 258,263 273,676 (46,210) (43,131)
Unrecognized net (gain) loss 40,295 (1,464) (6,002) (4,529)
Unrecognized prior service cost (25,796) (14,462) 19,555 18,199
Unrecognized transition asset (38,669) (45,157) (2,127) (2,446)
Adjustment required
to recognize minimum
liability - - (9,596) (7,669)
- -------------------------------------------------------------------------------------------------------------
Prepaid pension cost (pension
liability) $ 234,093 $ 212,593 $ (44,380) $ (39,576)
=============================================================================================================
</TABLE>
The assumptions used in determining the funded status of the U.S. plans were:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Actuarial assumptions:
Discount rate 8.25% 7.5% 8.5%
- --------------------------------------------------------------------------------------------------------------
Rate of increase in future
compensation levels 5.0% 4.5% 5.0%
- --------------------------------------------------------------------------------------------------------------
Expected long-term rate of
return on plan assets 8.5% 8.5% 8.5%
==============================================================================================================
</TABLE>
The changes in the discount rate and the rate of increase in future compensation
levels for the U.S. plans decreased the projected benefit obligation at March
31, 1995. This net decrease includes an decrease of $76,857,000 due to the
change in discount rate and an increase of $12,436,000 due to the change in the
rate of increase in future compensation levels.
47
<PAGE> 52
In accordance with the provisions of SFAS No. 87, "Employers' Accounting for
Pensions," the Delaware Company recorded, during fiscal years 1995 and 1994, an
additional minimum liability for certain of its U.S. plans of $9,596,000 and
$7,669,000 respectively. These liabilities resulted in recognition of intangible
assets of $9,536,000 and $7,022,000 and reductions in stockholder's equity of
$39,000 and $620,000, respectively, in fiscal years 1995 and 1994.
The two principal U.S. ERISA pension plans provide that, subject to certain
limitations, any excess assets in such plans would be used to increase pension
benefits if certain events occurred within a 60-month period following a change
in control of International.
Non-U.S Pension Plans
The net periodic pension (cost) benefit for fiscal years 1995, 1994, and 1993
included the following components:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Service cost - benefits earned during the period $ 2,403 $ 1,846 $ 1,790
Interest cost on projected benefit obligation 5,518 5,117 5,095
Actual return on plan assets (3,554) (14,328) (4,918)
Net amortization and deferral (3,859) 7,851 (2,528)
- -------------------------------------------------------------------------------------------------------------
Net periodic pension (cost) benefit $ 508 $ 486 $ (561)
=============================================================================================================
</TABLE>
The following table sets forth the plans' funded status (assets exceed
accumulated benefits) and amounts recognized in the Delaware Company's
consolidated financial statements:
<TABLE>
<CAPTION>
1995 1994
---- ----
(In thousands)
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested Benefit Obligation $ 60,893 $ 53,195
=============================================================================================================
Accumulated Benefit Obligation $ 62,420 $ 59,369
=============================================================================================================
Projected Benefit Obligation $ 70,254 $ 68,107
Plan assets at fair value 73,478 75,867
- -------------------------------------------------------------------------------------------------------------
Plan assets in excess of projected benefit obligation 3,224 7,760
Unrecognized net loss 16,370 12,347
Unrecognized prior service cost 3,339 3,080
Unrecognized transition asset (9,051) (10,843)
- -------------------------------------------------------------------------------------------------------------
Net prepaid pension cost $ 13,882 $ 12,344
=============================================================================================================
</TABLE>
48
<PAGE> 53
The assumptions used in determining the funded status of the non-U.S. plans
were:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Actuarial assumptions:
Discount rate 8.0-8.25% 7.0-8.0% 9.0-9.5%
- -------------------------------------------------------------------------------------------------------------
Rate of increase in future compensation levels 5.0% 5.0-6.0% 5.5-7.5%
- -------------------------------------------------------------------------------------------------------------
Expected long-term rate of return on plan assets 8.5-9.0% 8.0-9.0% 9.0%
=============================================================================================================
</TABLE>
The changes in the discount rate and the rate of increase in future compensation
levels for the non-U.S. plans decreased the projected benefit obligation at
March 31, 1995. This decrease includes a decrease of $1,539,000 due to the
change in discount rate and a decrease of $999,000 due to the change in the rate
of increase in future compensation levels.
Multiemployer Plans - One of the Delaware Company's subsidiaries
contributes to various multiemployer plans. The plans generally provide defined
benefits to substantially all unionized workers in this subsidiary. Amounts
charged to pension cost and contributed to the plans were $9,838,000,
$8,367,000, and $4,687,000 in fiscal years 1995, 1994 and 1993, respectively.
Postretirement Health Care and Life Insurance Benefits - The Delaware Company
offers postretirement health care and life insurance benefits to substantially
all of its retired regular full-time employees, including those associated with
discontinued operations, except certain non-resident alien retirees who are not
citizens of a European Community country or who, while employed, did not earn
income in the United States, Canada or the United Kingdom. The Delaware Company
shares the cost of providing these benefits with all affected retirees, except
for certain life insurance plans. Postretirement health care and life insurance
benefits are offered under separate defined benefit postretirement plans to
union and non-union employees. The health care plans are contributory and
contain cost-sharing provisions such as deductibles and coinsurance; the life
insurance plans are contributory and non-contributory. The Delaware Company does
not fund any of its plans.
49
<PAGE> 54
The following table sets forth the amounts recognized in the consolidated
financial statements at March 31:
<TABLE>
<CAPTION>
1995 1994
---- ----
(In thousands)
<S> <C> <C>
Accumulated Postretirement Benefit Obligation:
Retirees $ 311,699 $ 351,317
Fully eligible active participants 14,885 19,952
Other active plan participants 53,416 70,766
- -------------------------------------------------------------------------------------------------------------
380,000 442,035
Unrecognized net gain (loss) 19,185 (43,729)
- -------------------------------------------------------------------------------------------------------------
Accrued postretirement benefit cost $ 399,185 $ 398,306
=============================================================================================================
Weighted-average discount rate 8.25% 7.5%
=============================================================================================================
</TABLE>
The accumulated postretirement benefit obligation in the above table includes
$340,899,000 and $400,698,000 for the Delaware Company's health care plans and
$39,101,000 and $41,337,000 for the Delaware Company's life insurance plans at
March 31, 1995 and 1994, respectively. On January 31, 1995, approximately
$11,900,000 of the accumulated postretirement benefit obligation was transferred
to McDermott International, Inc. which related to former employees of the
Delaware Company that are now employees of J. Ray McDermott, S.A. The changes in
the accumulated postretirement benefit obligation and the unrecognized net gain
(loss) at March 31, 1995 were primarily attributable to the increase in the
discount rate.
Net periodic postretirement benefit cost for fiscal years 1995, 1994 and 1993
included the following components:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Service cost $ 4,488 $ 3,489 $ 3,217
Interest cost 31,659 31,721 31,226
Net amortization and deferral 2,944 19 -
- -------------------------------------------------------------------------------------------------------------
Net periodic postretirement benefit cost $ 39,091 $ 35,229 $ 34,443
=============================================================================================================
</TABLE>
For measurement purposes, a weighted-average annual assumed rate of increase in
the per capita cost of covered health care claims of 11-1/2% was assumed for
1995, 12-1/2% for 1994 and 13-1/2% for 1993. For 1996, a rate of 10-3/4% is
assumed. In all years, the rate was assumed to decrease gradually to 5% in 2005
and remain at that level thereafter. The health care cost trend rate assumption
has a significant effect on the amounts reported. For example, increasing the
assumed health care cost trend rates by one percentage point in each year would
increase the accumulated postretirement benefit obligation as of March 31, 1995
by $18,578,000 and the aggregate of the service cost and interest cost
components of net periodic postretirement benefit costs for fiscal year 1995 by
$2,530,000.
50
<PAGE> 55
NOTE 9 - SALE OF ACCOUNTS RECEIVABLE
The Babcock & Wilcox Company has an agreement with a U. S. bank, whereby it can
sell, up to a maximum limit of $225,000,000, with limited recourse, an undivided
interest in a designated pool of qualified accounts receivable. Under the terms
of the agreement, new receivables are added to the pool as collections reduce
previously sold accounts receivable. At March 31, 1995, approximately
$175,000,000 of receivables had been sold for cash under this agreement. At
March 31, 1994, approximately $170,000,000 had been sold. Receivables sold under
this agreement are presented as a reduction of accounts receivable on the
accompanying balance sheets. Included in Other-net income were expenses recorded
on the sale of receivables which represent bank fees and discounts of
$9,709,000, $8,699,000 and $7,851,000 in fiscal years 1995, 1994 and 1993,
respectively. Discounts are based on the bank's cost of issuing commercial paper
and bank fees are a fixed amount based on the maximum limit which may be sold.
NOTE 10 - REDEEMABLE PREFERRED STOCKS
At March 31, 1995 and 1994, 13,000,000 shares of Delaware Company Preferred
Stock, with a par value of $1 per share, were authorized. Of the authorized
shares, 2,818,780 shares of Series A Preferred Stock, and 2,917,236 and
3,474,652 shares of Series B Preferred Stock, respectively, were outstanding (in
each case, exclusive of shares owned by the Delaware Company) at March 31, 1995
and 1994. The outstanding shares are entitled to $31.25 per share in
liquidation. Both series of Preferred Stock are entitled to general voting
rights of one-half vote for each share. The Board of Directors of the Delaware
Company may authorize additional series of Preferred Stock, and may set terms of
each new series except that the Delaware Company cannot create any series of
stock senior to the existing Series A and Series B Preferred Stock without the
consent of the holders of at least 50% of the shares of such Preferred Stock.
Each share of the outstanding Series A Preferred Stock is convertible into one
share of Common Stock of International plus $0.10 cash. Series A and Series B
Preferred Stock are redeemable at the option of the Delaware Company at $31.25
per share, plus accrued dividends. On March 31, 1996 and each subsequent year
through March 31, 2008, the Delaware Company is obligated to redeem, at a
redemption price of $31.25 plus accrued dividends, 313,878 shares of Series A
Preferred Stock. On March 31 of fiscal years 1996 through 2006, and March 31 of
fiscal years 2007 and 2008, the Delaware Company is obligated to redeem 252,702
and 189,526 shares, respectively, of Series B Preferred Stock. For the five
fiscal years subsequent to March 31, 1995, the obligation to redeem the Series A
and B Preferred Stock is $17,706,000 for each of the fiscal years 1996 through
2000. The Delaware Company may apply to the mandatory sinking fund obligations
any Series A or B Preferred Stock reacquired, redeemed or surrendered for
conversion which have not been previously credited against the mandatory sinking
fund obligations. The Delaware Company applied 313,878 shares of Series A
Preferred Stock and 315,877 shares of Series B Preferred Stock that it owned to
satisfy the March 31, 1995 mandatory sinking fund obligations. During fiscal
year 1995 and 1994, 557,416 and 114,800 shares, respectively, of Series B
Preferred Stock were purchased in the open market. At March 31, 1995, 49,637
shares of Series A Preferred Stock have been converted to date and the Delaware
Company owned 1,261,627 and 241,539 shares of Series A and Series B Preferred
Stock, respectively.
51
<PAGE> 56
NOTE 11 - CONTINGENCIES AND COMMITMENTS
Litigation - The Delaware Company and certain of its officers, directors
and subsidiaries are defendants in numerous legal proceedings. Management
believes that the outcome of these proceedings will not have a material adverse
effect upon the consolidated financial position of the Delaware Company.
Products Liabilities - At March 31, 1995 and 1994, the estimated
liability for pending and future non-employee products liability asbestos claims
was $995,948,000 (of which less than $165,000,000 had been asserted) and
$1,122,099,000 and estimated insurance recoveries were $861,407,000 and
$987,046,000, respectively. During fiscal year 1995, the Delaware Company
received notice that provisional liquidators had been appointed to a
London-based products liability asbestos insurer and, as a result, a loss of
$14,478,000 related to the reduction of estimated insurance recoveries was
recognized. Estimated liabilities for pending and future non-employee products
liability asbestos claims are derived from the Delaware Company's claims history
and constitute management's best estimate of such future costs. Estimated
insurance recoveries are based upon analysis of insurers providing coverage of
the estimated liabilities. Inherent in the estimate of such liabilities and
recoveries are expected trends in claim severity and frequency and other
factors, including recoverability from insurers, which may vary significantly as
claims are filed and settled. Accordingly, the ultimate loss may differ
materially from amounts provided in the consolidated financial statements.
Environmental Matters - During the March 1995 quarter, a decision was
made to close certain nuclear manufacturing facilities and a provision for the
decommissioning, decontamination and the closing of these facilities of
$41,724,000 was recognized immediately. Previously, decontamination and
decommissioning costs were being accrued over these facilities' remaining
expected life. Decontamination will proceed as permitted by the existing NRC
license, while funding support will be sought and a decommissioning plan will be
submitted for review and approval as required by the NRC. B&W expects to have
reached agreement with the NRC in fiscal year 1997 on the plan that will provide
for the completion of facilities dismantlement and soil restoration by the end
of fiscal year 2001. B&W expects to request approval from the NRC to release the
site for unrestricted use at that time.
At March 31, 1995 and 1994, the Delaware Company had total environmental
reserves of $51,721,000 (including the provision discussed above) and
$13,513,000, respectively, of which $8,770,000 and $661,000 were included in
current liabilities.
The Delaware Company has been identified as a potentially responsible party at
various clean up sites under the Comprehensive Environmental Response,
Compensation and Liability Act, as amended. The Delaware Company has not been
determined to be a major contributor of wastes to these sites. However, each
potentially responsible party or contributor may face assertions of joint and
several liability. Generally, however, a final allocation of costs is made based
on its relative contribution of wastes to each site. Based on its relative
contribution of waste to each site, the Delaware Company's share of the ultimate
liability for the various sites is not expected to have a material effect on its
consolidated financial position.
The Department of Environmental Resources of the Commonwealth of Pennsylvania,
("PADER"), by letter dated March 19, 1994, advised B&W that it will seek
monetary
52
<PAGE> 57
sanctions, and remedial and monitoring relief, related to B&W's Parks Facilities
in Parks Township, Armstrong County, Pennsylvania. The relief sought relates to
potential groundwater contamination related to the previous operations of the
facilities. B&W is currently negotiating with PADER and expects to reach a
settlement without having to resort to litigation. Any sanctions ultimately
assessed are not expected to have a material effect on the consolidated
financial statements of the Delaware Company.
Operating Leases - Future minimum payments required under operating
leases that have initial or remaining noncancellable lease terms in excess of
one year at March 31, 1995 are as follows: 1996 - $6,673,000; 1997 - $6,600,000;
1998 - $6,560,000; 1999 - $6,650,000; 2000 - $6,661,000; and thereafter -
$22,306,000. Total rental expense for fiscal years 1995, 1994 and 1993 was
$52,684,000, $64,515,000 and $62,959,000, respectively. These expense figures
include contingent rentals and are net of sublease income, both of which are not
material.
Other - The Delaware Company performs significant amounts of work for the U. S.
Government under both prime contracts and subcontracts and thus is subject to
continuing reviews by governmental agencies.
The Delaware Company maintains liability and property insurance that it
considers normal in the industry. However, certain risks are either not
insurable or insurance is available at rates which the Delaware Company
considers uneconomical.
Commitments for capital expenditures amounted to approximately $9,059,000 at
March 31, 1995, all of which relates to fiscal year 1996.
The Delaware Company is contingently liable under standby letters of credit
totaling $184,365,000 at March 31, 1995, issued in the normal course of
business.
NOTE 12 - FINANCIAL INSTRUMENTS WITH CONCENTRATIONS OF CREDIT RISK
The Delaware Company's Power Generation Systems and Equipment customers are
principally the electric power generation industry (including government-owned
utilities and independent power producers), the U. S. Government (including its
contractors), and the pulp and paper and other process industries, such as oil
refineries and steel mills. The principal customers of the Marine Construction
Services segment are the large oil and gas companies and the U. S. and other
governments. These concentrations of customers may impact the Delaware Company's
overall exposure to credit risk, either positively or negatively, in that the
customers may be similarly affected by changes in economic or other conditions.
However, the Delaware Company's management believes that the portfolio of
receivables is well diversified and that such diversification minimizes any
potential credit risk. Receivables are generally not collateralized.
The Delaware Company believes that its provision for possible losses on
uncollectible accounts receivable is adequate for its credit loss exposure. At
March 31, 1995 and 1994, the allowance for possible losses deducted from
Accounts receivable-trade on the balance sheet was $7,425,000 and $6,427,000,
respectively.
53
<PAGE> 58
NOTE 13 - INVESTMENTS
The following is a summary of available-for-sale securities at March 31, 1995:
<TABLE>
<CAPTION>
Gross Gross Estimated
Unrealized Unrealized Fair
Cost Gains Losses Value
---- ---------- ---------- ---------
(In thousands)
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S. government
agencies $ 177,250 $ 1,085 $ - $ 178,335
Corporate notes and bonds 157,667 346 1,146 156,867
Other debt securities 26,877 - 183 26,694
- -------------------------------------------------------------------------------------------------------------
Total $ 361,794 $ 1,431 $ 1,329 $ 361,896
=============================================================================================================
</TABLE>
Proceeds and gross realized losses on sales of available for sale securities
were approximately $20,283,000 and $320,000, respectively for fiscal year 1995.
The amortized cost and estimated fair value of available-for-sale debt
securities at March 31, 1995, by contractual maturity, are shown below:
<TABLE>
<CAPTION>
Estimated
Fair
Cost Value
---- ---------
(In thousands)
<S> <C> <C>
Due in one year or less $ 117,436 $ 117,258
Due after one through three years 197,892 198,328
Due after three years 46,466 46,310
- -------------------------------------------------------------------------------------------------------------
$ 361,794 $ 361,896
=============================================================================================================
</TABLE>
NOTE 14 - DERIVATIVE FINANCIAL INSTRUMENTS
The Delaware Company operates internationally giving rise to exposure to market
risks from changes in foreign exchange rates. Derivative financial instruments,
primarily forward exchange contracts, are utilized to reduce those risks. The
Delaware Company does not hold or issue financial instruments for trading
purposes.
Forward exchange contracts are entered into primarily as hedges of certain firm
purchase and sale commitments denominated in foreign currencies. At March 31,
1995, the Delaware Company had forward exchange contracts to purchase
$234,233,000 in foreign currencies (primarily Canadian Dollars and Japanese
Yen), and to sell $135,138,000 in foreign currencies (primarily Canadian Dollars
and Japanese Yen), at varying maturities from fiscal year 1996 through 2000. At
March 31, 1994, the Delaware Company had forward exchange contracts to purchase
$300,302,000 in foreign currencies (primarily Canadian Dollars), and to sell
$233,425,000 in foreign currencies (primarily Canadian Dollars and Japanese
Yen), at varying maturities from fiscal year 1995 through 1998.
54
<PAGE> 59
Deferred realized and unrealized gains and losses from hedging firm purchase and
sale commitments are included on a net basis in the balance sheet as a component
of either contracts in progress or advance billings on contracts. They are
recognized in income as part of the purchase or sale transaction when it is
recognized, or as other gains or losses when a hedged transactions is no longer
expected to occur. At March 31, 1995, the Delaware Company had deferred gains of
$1,694,000 and deferred losses of $9,294,000 related to forward exchange
contracts which will be recognized in accordance with the percentage of
completion method of accounting.
The Delaware Company is exposed to credit-related losses in the event of
nonperformance by counterparties to derivative financial instruments, but it
does not anticipate nonperformance by any of these counterparties. The amount of
such exposure is generally the unrealized gains in such contracts.
NOTE 15 - FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Delaware Company in
estimating its fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amount reported in the balance sheet for
cash and cash equivalents approximates its fair value.
Investment securities: The fair value of investments are estimated based on
quoted market prices. For investments for which there are no quoted market
prices, fair values are derived from available yield curves for investments of
similar quality and terms.
Long and short-term debt: The fair value of debt instruments are based on quoted
market prices or, where quoted prices are not available, on estimated prices
based on current yields for debt issues of similar quality and terms.
Redeemable preferred stocks: The fair values of the redeemable preferred stocks
are based on quoted market prices.
Foreign currency exchange contracts: The fair values of foreign currency forward
exchange contracts are estimated by obtaining quotes from brokers. At March 31,
1995 and 1994, the Delaware Company had net forward exchange contracts
outstanding to purchase foreign currencies with a net notional value of
$99,095,000 and $66,877,000 and a fair value of $89,613,000 and $55,202,000,
respectively.
55
<PAGE> 60
The estimated fair values of the Delaware Company's financial instruments are as
follows:
<TABLE>
<CAPTION>
March 31, 1995 March 31, 1994
-------------- --------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------ ------------ ------------- -----------
(In thousands)
<S> <C> <C> <C> <C>
Balance Sheet Instruments
Cash and cash equivalents $ 21,014 $ 21,014 $ 47,364 $ 47,364
Investment securities 361,896 361,896 131,110 129,630
Debt excluding capital leases 719,390 738,385 605,235 644,898
Redeemable preferred stocks 179,251 174,108 196,672 193,064
</TABLE>
NOTE 16 - SEGMENT REPORTING
The Delaware Company operates in two industry segments - Power Generation
Systems and Equipment, and Marine Construction Services.
Power Generation Systems and Equipment's principal businesses are the supply of
fossil-fuel and nuclear steam generating systems and equipment to the electric
power generation industry, and nuclear reactor components to the U.S. Navy.
Marine Construction Services supplies services to offshore oil, natural gas and
hydrocarbon processing and to other marine construction companies. Principal
activities include design, engineering, procurement, fabrication and
construction, and project and construction management. This segment provides
maintenance and construction services for a variety of marine vessels for both
the inland and oceangoing shipping industries.
Intersegment sales are accounted for at prices which are generally established
by reference to similar transactions with unaffiliated customers. Identifiable
assets by industry segment are those assets that are used in the Delaware
Company's operations in each segment. Corporate assets are principally cash and
cash equivalents, short-term investments, marketable securities and prepaid
pension costs.
In fiscal years 1995, 1994 and 1993, the U. S. Government accounted for
approximately 16%, 17%, and 21%, respectively, of the Delaware Company's total
revenues. These revenues are principally included in the Power Generation
Systems and Equipment segment.
The provisions for the closing of certain facilities in fiscal year 1995
resulted in a decrease in the Power Generation Systems and Equipment segment
operating income of $46,489,000. The adoption of EITF Issue No. 93-5 in fiscal
year 1994 resulted in an increase in the Power Generation Systems and Equipment
segment operating income of $19,947,000. The adoption of SFAS No. 106 in fiscal
year 1993 resulted in a net decrease in segment operating income of $6,549,000.
This included a decrease of $3,753,000 in the Power Generation Systems and
Equipment segment and a decrease of $2,796,000 in the Marine Construction
Services' segment.
56
<PAGE> 61
Segment Information For the Three Fiscal Years Ended March 31, 1995.
1. Information about the Delaware Company's Operations in Different Industry
Segments.
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
(In thousands)
<S> <C> <C> <C>
REVENUES (1)
Power Generation Systems
and Equipment $ 1,663,017 $ 1,613,954 $ 1,520,976
Marine Construction Services (2) 559,950 632,242 449,169
Intersegment Transfer Eliminations (577) (2,830) (523)
- -------------------------------------------------------------------------------------------------------------
Total Revenues $ 2,222,390 $ 2,243,366 $ 1,969,622
=============================================================================================================
OPERATING INCOME (LOSS)
Segment Operating Income (Loss):
Power Generation Systems
and Equipment $ 24,691 $ 57,527 $ 68,545
Marine Construction Services(2) (31,659) 8,445 3,416
- -------------------------------------------------------------------------------------------------------------
Total Segment Operating Income (Loss) (6,968) 65,972 71,961
- -------------------------------------------------------------------------------------------------------------
Equity in Income of Investees:
Power Generation Systems
and Equipment 5,856 8,635 6,178
Marine Construction Services 4,478 445 477
- -------------------------------------------------------------------------------------------------------------
Total Equity in Income of Investees 10,334 9,080 6,655
- -------------------------------------------------------------------------------------------------------------
General Corporate Expenses (44,981) (43,059) (40,143)
- -------------------------------------------------------------------------------------------------------------
Total Operating Income (Loss) $ (41,615) $ 31,993 $ 38,473
=============================================================================================================
(1) Segment revenues include intersegment
transfers as follows:
Power Generation Systems
and Equipment $ 272 $ 2,439 $ 363
Marine Construction Services 305 391 160
-------------------------------------------------------------------------------------------------------
Total $ 577 $ 2,830 $ 523
=======================================================================================================
</TABLE>
(2) See Note 2 regarding the sale of a portion of the marine construction
service business during fiscal year 1995 and Note 3 regarding the
acquisition of DCC during fiscal year 1994.
57
<PAGE> 62
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
(In thousands)
<S> <C> <C> <C>
CAPITAL EXPENDITURES
Power Generation Systems and Equipment $ 45,306 $ 47,898 $ 45,086
Marine Construction Services(1) 25,322 45,038 11,927
Corporate 1,165 851 2,517
- --------------------------------------------------------------------------------------------------------------
Total Capital Expenditures $ 71,793 $ 93,787 $ 59,530
==============================================================================================================
DEPRECIATION AND AMORTIZATION
Power Generation Systems and Equipment $ 34,828 $ 36,567 $ 36,786
Marine Construction Services 30,054 29,256 44,828
Corporate 1,222 1,002 983
- --------------------------------------------------------------------------------------------------------------
Total Depreciation and
Amortization $ 66,104 $ 66,825 $ 82,597
==============================================================================================================
IDENTIFIABLE ASSETS
Power Generation Systems and Equipment $ 2,078,995 $ 2,180,358 $ 1,135,555
Marine Construction Services 236,823 440,546 368,602
Corporate 1,070,611 879,822 841,501
- ---------------------------------------------------------------------------------------------------------------
Total Identifiable Assets $ 3,386,429 $ 3,500,726 $ 2,345,658
===============================================================================================================
</TABLE>
(1) Fiscal year 1994 includes property, plant and equipment of $14,887,000 of
DCC (See Note 3) and the purchase of a fabrication yard financed by a note
payable of $16,250,000.
58
<PAGE> 63
2. Information about the Delaware Company's Operations in Different Geographic
Areas.
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Revenues(1) - United States $ 1,455,778 $ 1,632,236 $ 1,723,128
- Canada 751,214 588,728 227,066
- Other Foreign 15,398 22,402 19,428
- ---------------------------------------------------------------------------------------------------------------
Total $ 2,222,390 $ 2,243,366 $ 1,969,622
===============================================================================================================
Segment Operating Income (Loss)
- United States $ (31,685) $ 26,992 $ 61,150
- Canada 26,663 37,190 9,391
- Other Foreign (1,946) 1,790 1,420
- --------------------------------------------------------------------------------------------------------------
Total $ (6,968) $ 65,972 $ 71,961
==============================================================================================================
Identifiable
Assets - United States $ 1,940,950 $ 2,332,683 $ 1,344,548
- Canada 348,527 267,803 145,021
- Other Foreign 26,342 20,418 14,588
- Corporate 1,070,610 879,822 841,501
- --------------------------------------------------------------------------------------------------------------
Total $ 3,386,429 $ 3,500,726 $ 2,345,658
==============================================================================================================
</TABLE>
(1) Net of inter-geographic area revenues in fiscal year 1995 as follows:
United States -$61,797,000, Canada - $2,288,000, and Other Foreign -
$151,000; and in fiscal year 1994 as follows: United States - $20,702,000,
Canada - $8,167,000, and Other Foreign - $281,000. Inter-geographic
eliminations for fiscal year 1993 were immaterial.
59
<PAGE> 64
NOTE 17 - QUARTERLY FINANCIAL DATA (UNAUDITED)
The following tables set forth selected unaudited quarterly financial
information for the fiscal years ended March 31, 1995 and 1994:
<TABLE>
<CAPTION>
1995
----
Q U A R T E R E N D E D
--------------------------------------------------------------------------
JUNE 30, SEPT. 30, DEC. 31, MARCH 31,
1994 1994 1994 1995
---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C>
Revenues $ 568,692 $ 543,785 $ 560,994 $ 548,919
Operating income (loss) 2,099 (12,476) 28,312 (59,550)
Loss from before
cumulative effect of
accounting change (8,998) (40,795) 8,959 (33,046)
Net income (loss) (9,510) (40,795) 8,959 (33,046)
</TABLE>
Pretax results for the quarter ended June 30, 1994 include a reduction in
accrued interest expense of $5,700,000 due to settlement an outstanding tax
issue with the IRS. Results for the quarter ended September 30, 1994 include a
loss related to the reduction of estimated products liability asbestos claims
recoveries from insurance carriers of $14,478,000 and a reduction in accrued
interest expense of $5,600,000 due to settlement of outstanding tax issues.
Results for the quarter ended December 31, 1994 include a reduction in accrued
interest expense of $5,000,000 due to settlement of outstanding tax issues and
favorable worker's compensation cost adjustments of $6,067,000. Results for the
quarter ended March 31, 1995 include provisions of $46,489,000 for the closing
of certain facilities and a reduction in accrued interest expense of $10,000,000
due to settlement of outstanding tax issues.
<TABLE>
<CAPTION>
1994
----
Q U A R T E R E N D E D
-------------------------------------------------------------------------
JUNE 30, SEPT. 30, DEC. 31, MARCH 31,
1993 1993 1993 1994
---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C>
Revenues $ 446,073 $ 576,015 $ 613,407 $ 607,871
Operating income 946 17,751 9,128 4,168
Loss from before
cumulative effect of
accounting change (20,826) 1,803 (2,331) (4,962)
Net income (loss) (121,576) 1,803 (2,331) (4,962)
</TABLE>
Pretax results for the quarter ended June 30, 1993 include a favorable warranty
reserve adjustment of $11,000,000. Results for the March 1994 quarter include a
provision of approximately $8,807,000, including interest, resulting from an
unfavorable ruling on a lawsuit relating to a warranty issue and a reduction in
accrued interest on proposed tax deficiencies of $9,400,000.
60
<PAGE> 65
Item 9. DISAGREEMENTS WITH AUDITORS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
61
<PAGE> 66
P A R T I I I
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
There are no family relationships between any of the executive officers,
directors or persons nominated to be such, and no executive officer was elected
to his position pursuant to any arrangement or understanding between himself and
any other person.
Information required by this item is incorporated by reference to the material
appearing under the heading "Election of Directors" in the Information Statement
for action to be taken without a meeting of shareholders on August 8, 1995.
Item 11. EXECUTIVE COMPENSATION
Information required by this item is incorporated by reference to the material
appearing under the heading "Cash Compensation of Executive Officers and Certain
Relationships and Related Transactions" in the Information Statement for action
to be taken without a meeting of shareholders on August 8, 1995.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this item is incorporated by reference to the material
appearing under the heading "Election of Directors" in the Information Statement
for action to be taken without a meeting of shareholders on August 8, 1995.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item is incorporated by reference to the material
appearing under the heading "Cash Compensation of Executive Officers and Certain
Relationships and Related Transactions" in the Information Statement for action
to be taken without a meeting of shareholders on August 8, 1995.
62
<PAGE> 67
P A R T I V
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Annual Report or
incorporated by reference.
1. CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditors
Consolidated Balance Sheet March 31, 1995 and 1994
Consolidated Statement of Loss For the Three Fiscal Years
Ended March 31, 1995
Consolidated Statement of Stockholder's Equity For the Three
Fiscal Years Ended March 31, 1995
Consolidated Statement of Cash Flows For the Three Fiscal
Years Ended March 31, 1995
Notes to Consolidated Financial Statements For the Three Fiscal
Years Ended March 31, 1995
2. CONSOLIDATED FINANCIAL SCHEDULES
All required schedules will be filed by amendment to this Form 10-K on
Form 10-K/A.
3. EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<S> <C>
3 Articles of Incorporation and By-Laws (Item 3(a) is
incorporated by reference to Exhibit 3 to the Delaware
Company's annual report on Form 10-K, as amended, for the
fiscal year ended March 31, 1983; Item 3(b) is incorporated by
reference to Exhibit 3 to the Company's annual report on Form
10-K for the fiscal year ended March 31, 1981).
(a) The Delaware Company's Restated Articles of Incorporation
(b) The Delaware Company's By-Laws
</TABLE>
63
<PAGE> 68
<TABLE>
<S> <C>
4 Indentures with respect to certain of the Delaware Company's
long-term debt are not filed as exhibits hereto inasmuch as the
securities authorized under any such Indenture do not exceed
10% of the Delaware Company's total assets. The Delaware
Company agrees to furnish a copy of each such Indenture to the
Securities and Exchange Commission upon request.
10 Material Contracts (Exhibit 10(b) is incorporated by reference
to Exhibit 10 to the Delaware Company's annual report on Form
10-K for the fiscal year ended March 31, 1981; Exhibit 10(c) is
incorporated by reference to Exhibit 10 to the Delaware
Company's annual report on Form 10-K, as amended, for the
fiscal year ended March 31, 1983; and Exhibit 10(d) is
incorporated by reference to Exhibit 10 to the Delaware
Company's annual report on Form 10-K, as amended, for the
fiscal year ended March 31, 1987; Exhibit 10(e) is incorporated
by reference to Exhibit 10 to the Delaware Company's annual
report on Form 10-K for the fiscal year ended March 31, 1990).
(a) Supplemental Executive Retirement Plan
(b) Restoration of Retirement Income Plan for Certain
Participants in the Retirement Plan for Employees
of McDermott Incorporated
(c) Intercompany Agreement
(d) Trust for Supplemental Executive Retirement Plan
(e) Variable Supplemental Compensation Plan
22 Significant Subsidiaries of the Registrant
23 Consent of Independent Auditors
27 Financial Data Schedule
</TABLE>
FORM 8-K REPORTS
Reports on Form 8-K filed during the three months ended March 31, 1995 are as
follows:
Report on Form 8-K, Item 2 was filed on February 15, 1995
Report on Form 8-K/A, Item 7 was filed on March 31, 1995
64
<PAGE> 69
SIGNATURES OF THE REGISTRANT
Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized on June 16, 1995.
McDERMOTT INCORPORATED
-----------------------------------
(REGISTRANT)
By: s/Robert E. Howson
-----------------------------------
Robert E. Howson
Chairman of the Board and
Chief Executive Officer
s/Brock A. Hattox
-----------------------------------
Brock A. Hattox
Executive Vice President and
Chief Financial Officer
s/Daniel R. Gaubert
-----------------------------------
Daniel R. Gaubert
Vice President, Finance
and Controller
65
<PAGE> 70
SIGNATURES OF DIRECTORS
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated on June 16, 1995.
s/Robert E. Howson
-----------------------------------
Robert E. Howson
Chairman of the Board and
Chief Executive Officer, and
Director
s/Brock A. Hattox
-----------------------------------
Brock A. Hattox
Executive Vice President and
Chief Financial Officer, and
Director
s/Lawrence R. Purtell
-----------------------------------
Lawrence R. Purtell
Senior Vice President and
General Counsel and
Corporate Secretary, and
Director
66
<PAGE> 71
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Description Pages
- ------- ----------- ------------
<S> <C> <C>
3 Articles of Incorporation and By-Laws (Item 3(a) is incorporated by
reference to Exhibit 3 to the Delaware Company's annual report on
Form 10-K, as amended, for the fiscal year ended March 31, 1983; Item
3(b) is incorporated by reference to Exhibit 3 to the Company's
annual report on Form 10-K for the fiscal year ended March 31, 1981).
(a) The Delaware Company's Restated Articles of Incorporation
(b) The Delaware Company's By-Laws
4 Indentures with respect to certain of the Delaware Company's
long-term debt are not filed as exhibits hereto inasmuch as the
securities authorized under any such Indenture do not exceed 10% of
the Delaware Company's total assets. The Delaware Company agrees to
furnish a copy of each such Indenture to the Securities and Exchange
Commission upon request.
10 Material Contracts (Exhibit 10(b) is incorporated by reference to
Exhibit 10 to the Delaware Company's annual report on Form 10-K for
the fiscal year ended March 31, 1981; Exhibit 10(c) is incorporated
by reference to Exhibit 10 to the Delaware Company's annual report on
Form 10-K, as amended, for the fiscal year ended March 31, 1983; and
Exhibit 10(d) is incorporated by reference to Exhibit 10 to the
Delaware Company's annual report on Form 10-K, as amended, for the
fiscal year ended March 31, 1987; Exhibit 10(e) is incorporated by
reference to Exhibit 10 to the Delaware Company's annual report on
Form 10-K for the fiscal year ended March 31, 1990).
(a) Supplemental Executive Retirement Plan
(b) Restoration of Retirement Income Plan for Certain Participants in
the Retirement Plan for Employees of McDermott Incorporated
(c) Intercompany Agreement
(d) Trust for Supplemental Executive Retirement Plan
(e) Variable Supplemental Compensation Plan
22 Significant Subsidiaries of the Registrant
23 Consent of Independent Auditors
27 Financial Data Schedule
</TABLE>
67
<PAGE> 1
EXHIBIT 22
MCDERMOTT INCORPORATED
SIGNIFICANT SUBSIDIARIES OF THE REGISTRANT
FISCAL YEAR ENDED MARCH 31, 1995
<TABLE>
<CAPTION>
PERCENTAGE
ORGANIZED OF VOTING
UNDER THE SHARES
NAME OF COMPANY LAWS OF OWNED
<S> <C> <C>
Hudson Engineering Corporation Texas 100
Babcock & Wilcox Investment Company Delaware 100
Babcock & Wilcox - ST Company Delaware 100
The Babcock & Wilcox Company Delaware 100
Americon, Inc. Delaware 100
Babcock & Wilcox Industries Ltd. Canada 100
Power Systems Operations, Inc. Delaware 100
</TABLE>
The subsidiaries omitted from the foregoing list do not, considered in the
aggregate, constitute a significant subsidiary.
68
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-3 No. 33-54940) of McDermott Incorporated and in the related Prospectuses of
our report dated May 24, 1995 with respect to the consolidated financial
statements of McDermott Incorporated, included in this Annual Report (Form 10-K)
for the year ended March 31, 1995.
ERNST & YOUNG LLP
New Orleans, Louisiana
June 23, 1995
69
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRATED FOM MCDERMOTT
INCORPORATED'S MARCH 31, 1995 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1995
<PERIOD-END> MAR-31-1995
<CASH> 21,014
<SECURITIES> 130,195
<RECEIVABLES> 241,313
<ALLOWANCES> 8,308
<INVENTORY> 284,976
<CURRENT-ASSETS> 936,009
<PP&E> 705,489
<DEPRECIATION> 402,500
<TOTAL-ASSETS> 3,386,429
<CURRENT-LIABILITIES> 957,589
<BONDS> 423,150
<COMMON> 4
179,251
0
<OTHER-SE> 412,531
<TOTAL-LIABILITY-AND-EQUITY> 3,386,429
<SALES> 2,222,390
<TOTAL-REVENUES> 2,222,390
<CGS> 2,274,339
<TOTAL-COSTS> 2,274,339
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 41,336
<INCOME-PRETAX> (103,269)
<INCOME-TAX> (29,389)
<INCOME-CONTINUING> (73,880)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (512)
<NET-INCOME> (74,392)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
